The GJEPC’s banking conference witnessed a slew of proactive measures by the diamond and jewellery industry to mitigate financing risks and enhance confidence, including the release of a white paper, making MyKYC compulsory, and proposing third-party inventory evaluators. Solitaire International reports.
The Gem & Jewellery Export Promotion Council (GJEPC) organised a day-long banking conclave on May 11th in Mumbai with the aim of bringing the trade and banking community on a single platform to discuss and understand critical financing issues.
Suresh Prabhu, minister for commerce and industry and civil aviation, unveiled a white paper drafted by GJEPC, titled “Diamond and Jewellery Financing 2018: Mitigating Risks Effectively”, which detailed the key challenges faced by bankers in financing the diamond and jewellery industry and offered recommendations to banks and trade members for mitigating risks.
The conference sought to find ways to reduce risks and infuse confidence in financiers. It was attended by leading banks and financial institutions including State Bank of India (SBI), Central Bank of India, IndusInd Bank and Export Credit Guarantee Corporation of India Ltd. (ECGC), as well as major industry players.
Commenting on the GJEPC’s efforts to publish the white paper, Prabhu stated, “I am happy that such a white paper on diamond and jewellery financing has been brought by the Council. I hope the active participation of banks, ECGC and other stakeholders will help in strategising the development of the gems and jewellery industry that has a proven track record of continuous job creation and economic development.”
Hailing the gem and jewellery industry that employs 5 million people and contributes about 7% of the country’s GDP and is the fastest growing sector, Prabhu urged banks to understand the various aspects of the industry and finance new businesses, but with proper risk-mitigation processes in place. “We will never encourage wrongdoers in the industry but will ask our financial system to support all genuine players in the gems and jewellery sector. This is essential to help the industry realise the full potential. But the banks must always evaluate credit risk, spot legitimate players and lend finance to make banking safe,” he said. Prabhu added, “With three million new jobs on the anvil, the banks should not hesitate to fund the industry’s efforts which are bona fide, transparent and above board. Also, considering the fact that the sector is on a growth spiral and in view of the potential the industry has in future, the banks should further step up lending efforts to legitimate players fuelling the trade.”
Finance SMEs
Obliquely referring to the Nirav Modi-PNB-Choksi scam, Rita Teaotia, secretary, department of commerce, ministry of commerce & industry, noted that although the industry is transitioning through a difficult time, the government by its very presence here reflects its support for this industry. With all its difficulties and complexities, the sector, Teaotia commented, was important because it contributed 14% of India’s exports, 7% of the national GDP, and employs 5 million people. “Perhaps the numbers may even be larger than that,” she said, adding, “It’s important also because it provides engagement to a very large number of small and medium enterprises (SMEs) throughout the country. So as a sector, this is important for all of us.”
Teaotia referred to the unfortunate instance that came to light earlier this year, and urged that without pointing fingers at one another, the industry and bankers should introspect, adding that the banking sector must also investigate the reason for the failure of the system.
Insisting that everyone had to follow prudent norms, Teotia hailed the MyKYC Bank initiative that is now mandatory for all Council members. She noted that it was a wonderful move and the way to go forward. “This initiative will improve confidence, boost lending to the sector, ensure better sharing of information and transparency and growth of this SME sector.
“We must recognise that this is necessary for our own credibility, for building confidence in our partners – the banks and the financial institutions. The white paper by the GJEPC, too, has some very substantial suggestions.”
Teaotia recommended that the major stakeholders such as bankers, industry members and financial institutions should set up a standing committee and hold talks on a regular basis to come up with solutions. “This cannot be a one-way street at all. Use this as an opportunity to see the major recommendations, to begin with, of the white paper, to see which of these recommendations we need to work with, what is the functioning of the MyKYC system, and how the gem and jewellery industry can support the financial institutions to earn their confidence and to ensure much deeper lending to the sector. This will be important for us to build some confidence and have a continuous exchange of information.”
Teaotia urged the banks to support the gems and jewellery industry, which is a significant part of India’s GDP, that cannot be ignored. “And if only 1% of bank lending is going to the sector, I think that requires us to really be concerned about why we are failing, because the intention or the brunt of a failure should not be to make us completely risk-averse. That’s not the reason financial institutions exist.” She stressed on professionalism and transparency as the two pillars to rely on for further growth.
Teaotia also emphasised the importance of financially supporting SMEs, adding that the NPAs amongst the SMEs were at a far lower ratio than among the larger companies. She acknowledged the fact that assessing the SMEs may be hard work and the loans disbursed to them are smaller in comparison, yet require the same amount of due diligence. She added, “We are failing in a significant manner if we neglect the SME sector.”
She also recognised that the ECGC has adopted this policy line and almost 85% of its beneficiaries belong to the SME sector.
Mitigating bank risks
Representing the industry’s resolve to find a solution and rebuild the confidence of the financing community, GJEPC chairman Pramod Agrawal said, “We wish to take this industry to new heights in the future and contribute to the country’s economic growth and generate employment. We, as an industry, promise to address the issues to the satisfaction of the banks. In fact, this is the only industry in India which has created arbitration mediums with the banks and parties in case of NPAs to achieve recoveries.”
Agrawal hailed the banks for playing an important role in developing the industry, but added that an estimated total finance given to the gem and jewellery industry amounted to only 1% of total bank financing, or R70,000 crore, while the industry contributes around R40,000 crore by way of value addition to the nation.
Referring to the scam, Agrawal said, “The industry has been put into a difficult situation due to the wrongdoings of certain individuals. But the whole industry cannot be blamed for it and made to suffer. Similarly, the entire banking community cannot be blamed for the wrongdoing of a few people at a certain bank branch. Even the RBI and the government cannot be blamed as the transactions were not in line with the RBI guidelines.”
He clarified that the diamond industry, in general, does not use the facility of Letters of Understanding (LOUs) and Letters of Credit (LCs) in its business operations. “However, every happening teaches us lessons based on which corrective and proper measures need to be taken, so that a similar incident should not happen in the future and such individuals should not take the industry or banks for a ride.”
Agrawal informed that the Council is in the process of strengthening self-regulation measures by initiating the MyKYC Bank, which will secure business in the future and mitigate risk by banks.
Agrawal then went on to enumerate the positive steps taken by the GJEPC to push growth. The Council has already set up Indian Institute of Gem & Jewellery (IIGJ) at Mumbai, Delhi, Jaipur, Surat, Varanasi and Udupi, offering a variety of courses for providing trained manpower to the industry and strengthening manufacturing in India. The industry is also expanding its manufacturing base with the help of the ministry of commerce & industry by setting up thirteen Common Facility Centres (CFCs) in different gems and jewellery clusters pan India. Cluster mapping is also being undertaken by the GJEPC and will help small exporters and karigars, who are the lifeblood of the industry, but cannot afford to buy costly machines. The Council has also initiated on-site training programmes in the tribal pockets of Ratnagiri and Sindhudurg, Maharashtra.
Under the leadership and guidance of Suresh Prabhu, GJEPC recently signed an MoU with MIDC, Maharashtra, for setting up the largest jewellery park in India. The project will attract an investment of R13,000 crore in the next 2-5 years and employ more than 1 lakh people.
Agrawal also announced that the GJEPC was planning to establish the world’s first gem bourse in Jaipur, which will employ an additional 90,000 people.
MyKYC now mandatory
Addressing the audience, Colin Shah, vice chairman, GJEPC, reminded the members that “at the current level of 5 million jobs being provided by the industry, it is among the largest employment generators contributing $10 billion to the balance of payments.” Having been at the helm of drafting the white paper, Shah felt that the joint efforts of key financiers and industry members have been able to address many risk factors and MyKYC will be the single largest contributor in increasing transparency and addressing relevant risks.
“Since the ‘incident’ that happened in early February, the Council decided to take action to do something that was in the best interest of future generations and the industry. Self-regulation was what we, as the Council, put all our hearts and minds into. Together we worked very hard these last two months to make this event and MyKYC a reality,” Shah said.
Citing figures to put things into perspective, Shah noted that the export growth of the industry on an average over the last 10 years stood at 6.2%. A decade ago, it was a $21 billion industry and now it is a $41 billion industry. As for imports, the industry grew 4.8% from $18.6 billion to $31 billion.
Last year, the gem and jewellery industry had a 5% growth. Diamonds grew only 4%, jewellery grew at 10%, but volume wise, India has peaked (14 out of 15 diamonds in the world are polished here). “In diamonds, growth in the next five years will be ramping up the manufacturing, in spite of beneficiation, and going up in the value chain and becoming a very vibrant trading centre. Also, we will need a more vibrant taxation policy,” he added.
He further said that India’s GDP is $2.6 trillion, and the total export is around $300 billion, of which the gem and jewellery industry contributes $40 billion or 14% of the total. The gross bank credit is $1.2 trillion out of which the Indian gem and jewellery industry uses $11 billion, and that translates into just 1% of India’s banking loans.
“India has 50 million people in manufacturing jobs in all the industries put together, of which 5 million or 10% of India’s total manufacturing jobs are created by the gem and jewellery industry. So there is a lot of good happening in this industry as well.”
Condemning the scam, Shah commented that it should not have happened, “but we have to work around the concerns, and with this perspective, the Council is vigourously pushing for MyKYC, an independent, not-for-profit subsidiary of GJEPC, that provides a centralised platform for companies in the industry to complete and manage their KYC in line with global standards. Users can easily and quickly share their own KYC data among trade connections as well as banks and other financial intermediaries.”
In initial talks with bankers, the Council identified four clear risks: compliance risk; identification of genuine companies; determining credit worthiness (financial risk); and transaction risk. “MyKYC addresses only the first two – compliance risk and identity risk,” Shah revealed, adding, “It identifies genuine companies. The initial approval is online and the final approval is on the MyKYC portal, which is done only after the physical verification of all documents completed by the team. Each company gets a unique identification number. Membership is allowed only to companies who are members of any ‘approved industry body’.”
The MyKYC team has been independently scouring the net for bad press on a regular basis, and checks if a company that has applied for MyKYC is in any kind of trouble with the banks, etc. Shah likened the KYC ID to an Aadhaar Card that captures all the details and like the card, the KYC team updates all the details of buyers and sellers on a regular basis.
Currently, there are 1,500 companies registered with MyKYC Bank and 600 are being processed for membership. The Council is also in talks with various industry bodies such as the GJC, WFDB, LBMA, AWDC and more to join forces. As a precautionary measure before sanctioning loans, Shah urged the banks to make sure that the beneficiaries were registered with MyKYC Bank because the Council had made KYC compulsory for its members.
“Be it a buyer or a seller, this is the only portal of its kind that has a two-way KYC. Companies who are not on this portal should not get finance and we, as an industry, should not get a bad name,” Shah concluded. He even invited banks to be part of the portal to ensure that they have a good experience.
Emphasis on best practices
In his address, Paul Rowley, executive vice president of global sightholder sales at De Beers UK, stated that the long-term rough diamond supply-demand outlook, according to Bain, shows demand growth outpacing supply growth until 2030. So, the market is set for success, he noted, adding, “The question then is how do we, as an industry, create and benefit from that success? Over the past couple of years, finance has tightened and indeed quite a bit of finance has exited the diamond industry. And we’re now starting to see it come back and that’s a positive move.
“When regulatory and compliance come together, we have a healthy situation. Back in 2014 when we started our new sightholder contract, we were very much looking at this. We created new gating criteria of financial compliance for our customers. We wanted to see much greater financial transparency, more open and transparent corporate structuring and governance, and strong best practice principles that had been there for a number of years. The reason for that was because we were seeing at the time some concerns about the opaqueness of our industry. And we wanted to understand the business and make sure it was ethical. Coming back to best practices, our product is a symbol of love. Its true value is emotion and anything around it has to have the right corporate social responsibility. We need to have an ethical business. Issues like corruption and money laundering will taint the very nature of the product that we believe is the ultimate symbol of love – the natural diamond.
“There are some wonderful CSR initiatives happening within India. I don’t think we actually acknowledge what we do in this space, particularly in India.
“In conclusion, when I look at stocks across the full pipeline, retail is in a much healthier position, certainly so is the midstream having sold through all the idle stock, and there’s no doubt at the producer level we don’t have huge amounts of stock and we’re producing to that demand that we envisage in the future. So it’s down to the industry to ensure that we are the owners of our own success. We need to ensure that we do indeed be very transparent financially. We need to treat the banks’ money just as we would our own money and make sure that we’re successful and sustainable into the future.”
The other view
Dinesh Kumar Khara, managing director of risk, IT & subsidiaries wing, SBI, noted that banks were open to financing the to the economy of the country, but the recent incident had shaken the confidence of bankers. Currently, the industry was perceived as a risky sector. Seminars of this nature, Khara believed, were helpful for coming together and introspecting and addressing concerns. He lauded the self-regulatory initiatives being taken by the industry. However, he cautioned that the perception of bankers as well as the probability of default continues to be high – though the mitigants that have been brought in terms of MyKYC, valuation mechanism of diamonds, the mitigation in terms of the arbitration appraisal, which has been thought through in the event of any default are the moves in the right direction.
“These mitigants have to stand the test of time,” he noted, “and only then will the confidence of bankers to finance the industry increase. Also, the industry on its part must live up to the charter and not allow any kind of discrepancy. All of us have learnt the lesson but the cost of that lesson is very high. In view of that, an honest practice of these initiatives is something we are looking forward to.”
I’ve heard from many smaller companies that they are finding it increasingly difficult to access finance, maybe more so now because the bank is compelled to cross all the Ts and dot all the Is and go by the book, especially in public sector banks, given the episode in February.”
Group think
The banking summit concluded with a group discussion that was moderated by Latha Venkatesh, CNBC-TV18 executive editor for banking and commodities, who initiated a dialogue between the bankers and traders with the aim of finding common ground on the issues at hand.
Representing the banks were SBI deputy managing director P.N. Prasad, IndusInd Bank executive vice president and head of diamond and jewellery division Biju Patnaik, Emirates NBD general manager – specialised industries group George Abraham, Central Bank of India field general manager Kamlesh Taneja, and ECGC executive director
M. Senthilnathan.
Speaking on behalf of the trade were ministry of commerce and industry joint secretary Manoj Dwivedi, Russell Mehta of Rosy Blue, Rajiv Mehta of Dimexon, Sanju Kothari, convener of the GJEPC’S banking, insurance and taxation sub-committee, and Mavjibhai Patel of Kiran Gems.
In response to a question about whether banks had reduced lending to the Indian gem and jewellery industry following the February incident, Prasad noted that there wasn’t a considerable reduction in exposure to the industry, although issues related to compliances, credit risk, transaction risk, the opaque nature of the diamond business, a lack of professionalism and corporatisation could be some of the reasons prohibiting bankers from looking at this sector.
Responding to the same question, Russell Mehta said, “I’ve heard from many smaller companies that they are finding it increasingly difficult to access finance, maybe more so now because the bank is compelled to cross all the Ts and dot all the Is and go by the book, especially in public sector banks, given the episode in February. So the processes and the paperwork have become much more cumbersome than what it used to be in the past.”
Venkatesh observed that the midstream is paying cash for its raw material and giving its finished product on credit, thus getting “squeezed on both sides”. She asked why the top 100 midstream companies, which account for 85% of the business, were not getting together to ask miners for credit.
George Abraham replied that financing is the lifeblood of the diamond industry because they don’t get a cent of credit from the miners. He explained that miners cannot take receivables as they themselves have huge capital expenditure that takes 7-10 years to get returns.
In response, Dwivedi suggested that the diamond industry could come together and create a fund that can be a risk mitigator, which may be handled through the GJEPC or a consortium of exporters, thereby reducing the sector’s dependence on third parties like the ECGC or banks.
Senthilnathan noted that the ECGC’s recovery rate of the last 15 years has been 25% across all industries. “When you remove gems and jewellery, the recovery improves to 33%. In the gems and jewellery sector, the recovery is 7%. What this implies is that when a default happens in the post-shipment stage, banks don’t have stocks to even do some risk or loss minimisation. What banks have is a piece of paper – a sale document to the foreign buyers and nothing comes back,” he noted.
“In the last ten years, only because of failures in the gem and jewellery industry, the ECGC has faced a 1,200% increase in reinsurance cost for its portfolio and not a single paisa has been passed on to the gem and jewellery industry,” Senthilnathan revealed.
In a rejoinder, Rajiv Mehta asked the ECGC to evaluate prospective companies after understanding the underlying risk and not finance a sector in general. Sanju Kothari proposed that the ECGC should diversify its business risk by providing finance and cover to the small and medium enterprises (SME) sector because of the low risk factor.
The panel concluded that besides self-regulation, an open dialogue between bankers and the traders was crucial to avoid occurrences like the February incident. With the checks and balances in place, all the stakeholders would stand to benefit and take the diamond and jewellery industry to the next level of growth.
GJEPC & AWDC ANNOUNCE MYKYC BANK PARTNERSHIP
One of the banking summit’s highlights was the signing of an agreement between the Gem & Jewellery Export Promotion Council (GJEPC) and the Antwerp World Diamond Centre (AWDC) for cooperation on the MyKYC Bank platform.
MyKYC Bank provides a centralised platform for companies in the diamond industry to complete and manage more efficiently their KYC obligations in conformity with global standards. Users can easily and quickly share their own KYC data among trade connections as well as banks and other financial intermediaries, providing the confidence that comes with open information sharing.
As a result of the collaboration between the two authorised industry bodies AWDC and GJEPC, MyKYC Bank will encompass the members of the world’s largest diamond trade and manufacturing communities, Antwerp and India. “The platform will become a powerful tool that can significantly reduce compliance costs for users, bring greater transparency to the industry and build confidence among other industry stakeholders, such as financial institutions and governments,” said Pranay Narvekar, CEO of MyKYC Bank.
“The AWDC is very pleased to announce this partnership with the GJEPC as we seek to provide a seamless and transparent KYC process across the globe,” noted AWDC CEO Ari Epstein. “With increasingly strict compliance norms, banks are expected to do due diligence for transactions. With the MyKYC Bank platform, we are promoting a network where all the KYC information is easily available, effectively lowering the compliance risks for banks and giving them greater confidence.”
“MyKYC Bank is one of GJEPC’s self-regulation initiatives to further enhance the level of transparency in business. This will ensure updated KYC information to all trading partners, enabling them to fully meet the compliance standards for KYC as per the law,” said Pramod Agrawal, chairman, GJEPC.