$1.8bn Indian fraud causes jewellery trade pain

Banks have become very cautious about lending to the segment and steps are being taken to ensure credit is given only to genuine exporters

The 'Dynasty' diamond, cut from the 179-carat Romanov rough diamond discovered by Alrosa PJSC, is displayed in Moscow, Russia, on Tuesday, Aug. 1, 2017. In 2015, Alrosa discovered a giant, 179-carat rough diamond in a mine in the northeast region of Sakha, naming it Romanov after the family that ruled for more than 300 years before the Russian Revolution. Photographer: Andrey Rudakov/Bloomberg

In his 50 years as a jeweller, Pankaj Parekh has seen a few scams shake the credibility of India’s $60 billion gem and jewellery industry.

The latest multibillion-dollar fraud will give banks the impetus to rein in credit for around 300,000 of his counterparts, he says.

Already, Mr Parekh’s business has come under increased scrutiny. One lender last week questioned the validity of a recurring expense charged by a gold supplier for 180 rupees (Dh10.28) on his books, he said.

“To date, not once had my lender asked me about this charge,” Mr Parekh said in Kolkata, where his family-run jewellery export business is based. “But now, they are raising queries for everything.”

It’s an unpleasant deja vu moment for India’s jewellers, who are involved in cutting or polishing 12 out of 14 diamonds sold in the world. The $1.8 bn fraud at one of the nation’s biggest banks, allegedly perpetrated by jewellery house owner Nirav Modi, is reminiscent of a diamond company that defaulted five years ago, leading to credit tightening for the industry, India’s second-biggest foreign exchange earner.

In 2013, Surat-based Winsome Diamonds and Jewellery, owned by Jatin Mehta, was declared a wilful defaulter by the banks. Winsome and two associate companies owed banks including Standard Chartered and Punjab National Bank about 68bn rupees, and investigations are ongoing. Last year, investigators arrested the owner of jeweller Shree Ganesh Jewellery House for an alleged fraud of 22bn rupees, involving about two dozen banks.

Winsome was a watershed moment for Indian banking as it was the second-biggest corporate default after Kingfisher Airlines at the time, prompting lenders to put the gems and jewellery industry in the high-risk category and reduce credit to the segment. According to the latest central bank data, Indian lenders have a combined exposure of about $11bn to the sector and only 2.9 per cent of that amount was deemed a “bad loan”.

“After the Winsome episode happened, the industry’s confidence levels were hit and the banking industry had almost zero confidence in the sector,” said Vipul Shah, managing director of exporter Asian Star, in Mumbai. The industry, comprised mainly of businesses with more than two people, found it difficult to get financing five years ago, and will face similar pressures again now, Mr Shah said.

Over the past two weeks, banks have become very cautious about lending to the segment and steps are being taken to ensure that credit is given only to genuine exporters and not those engaged in so-called round tripping, which involves importing and exporting the same consignment repeatedly to benefit from lower interest rates on loans from banks, according to people familiar with the matter.


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Bankers are reviewing all diamond and jeweller-related accounts and in some cases are seeking more collateral and extra documentation, they said.

Mr Shah, who was the chairman of the government-sponsored Gem & Jewellery Export Promotion Council during the turbulent period following the Winsome default, said the industry had a tough time restoring the banking industry's confidence.

“The diamond business is entirely based on trust,” he said. “Now the trust factor is gone. How to make sure that something like this doesn’t happen in the future?”

Globally, companies polishing and trading diamonds depend on short-term finance to purchase rough stones, which are sold at a profit to repay the loan. Fewer banks are willing to provide that service.

In 2016, Standard Chartered, then one of the two leading lenders to the industry, said it was exiting its $2bn diamond financing business, while KBC Group’s Antwerp Diamond Bank, which made up about a 10th of the financing market at its peak and served the industry for 80 years, is being wound down.

India exported $43bn worth of gems and jewellery in the year ended March 2017, accounting for about 16 per cent of the country’s total merchandise exports, according to the trade body.

“This is a very sorry situation when we are trying to be the world leaders in the jewellery field and these kinds of things happen,” Mr Shah said. “It will disturb the business.”

With bank credit expected to tighten, production is estimated to decline, hitting exports and even leading to job losses, according to Pravin Nanavati, owner of Surat-based SHE Jewels and a former president of the Surat Diamond Association. “There is no other entity that can lend the huge sums that the industry needs,” Mr Nanavati said.

While the industry is not to be blamed for the debacle, as it is an isolated instance of misuse by some individuals, the sheer scale of the money involved in transactions makes it vulnerable to such incidences, said Anoop Mehta, president of the sprawling 20-acre Bharat Diamond Bourse in Mumbai that houses the bulk of the gem and jewellery exporters in the city.

“The magnitude of the fraud is mind-boggling,” said Mr Mehta, who has been working in the sector for nearly four decades. “One is shocked, but at the end of the day, to put the whole thing on the industry is ridiculous. But if I go to Punjab National Bank today and say I want to enhance my limit, I know he is in no mood to do it. It is unfortunate.”

The Punjab National Bank in its complaint to the federal investigation agency – the Central Bureau of Investigation – alleged that the fraud was led by Mr Modi. The bank claims they used fake PNB guarantees to obtain loans from the overseas branches of Indian banks, claiming to need the cash to import pearls, according to documents made public or seen by Bloomberg.

PNB has also registered a case against Mehul Choksi’s Gitanjali Group of companies for alleged losses of 48.87bn rupees to the exchequer, according to the CBI.

“Life is going to be more tough for everyone,” said Rajiv Jain, chairman of Jaipur-based gem stone manufacturing and exporting company Sambhav Gems. “Somebody may have broken the rules, but the entire industry is going to face the consequences.”