BANKERS’ COMMITTEE PROPOSES NEW LENDING NORMS FOR DIAMOND INDUSTRY

A bankers committee led by State Bank of India has recommended that bank finance to the diamond industry against stocks and receivables should not exceed 50%, diamond merchants who avail of working capital loans should bring in 25% as margin, residential properties should also be obtained by creditors as collateral and that such properties should not be substituted with cash, among other things.

The proposals, discussed between banks and an apex industry body, come after a rise in industrywise bad debt or non-performing assets (NPAs) to Rs 2,500-3,000 crore. Banks give diamond companies packing credit for buying stock (rough diamonds) and manufacturing and post-shipment credit against receivables (sales of cut and polished diamonds). Normally, 40% of credit is given as packing credit and 60% as post-shipment credit to sightholders.

It has now been proposed to tweak the ratio to 35%:65% to increase the amount of post-shipment credit.

In certain cases, bank finance to total current assets (stocks and receivables) could run up to 60-65% for some large companies while working capital margins could be as low as 10-15% even though companies not heavily dependent on banks could bring in as much as 33-50% to the table.

In addition to factory premises and office spaces, residential properties were proposed to be increasingly taken as collateral, said a senior banker. “Residential properties are not frequently put up as collateral, and, in cases they are, debtors often request banks to accept cash instead of properties, since they appreciate in value. Banks have been advised to discourage the substitution of properties with cash and release residential premises offered as collateral,” he said.

Bankers present at the meeting between creditors and Gems & Jewellery Export Promotion Council (GJEPC) told ET that the proposed measures come amid a rise in bad debt, estimated at around Rs 2,500-3,000 crore, in the diamond industry. Another senior banker said that NPAs running into thousands of crore would reduce confidence among banks lending to the industry unless steps were taken to reduce the risks creditors faced in lending to the industry.

SOURCE: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/bankers-committee-proposes-new-lending-norms-for-diamond-industry/articleshow/7102285.cms