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Banks remain wary of exposure to jewellery sector

Amid instances of loan defaults in the gems and jewellery sector, banks on Saturday said they remained wary of increasing financial support to this segment. Besides the challenge of non-performing assets, lack of transparency in operations and diversion of funds were also seen as bugbears, hitting ties between jewellers and bankers.

“As of today, there is a huge trust deficit. It is said diamonds are forever. I think diamond merchants should also be forever,” said S S Mundra, chairman and managing director of Bank of Baroda, while addressing a convention organised by the Gems & Jewellery Export Promotion Council here.

He added intermingling of businesses — gold, diamond and jewellery — was making it difficult to separate business streams and understand their workings. Also, some companies indulged in interest rate arbitrage, Mundra said, adding there was concern about selling on a consignment basis, as well as sales to associates.

At the convention, bankers expressed concern at diversion of funds. They said they had come across instances in which funds disbursed to gems and jewellery companies were deployed in the capital market and real estate.

State Bank of India Chairperson Arundhati Bhattacharya said different business segments — diamond, gems and jewellery — should be at arm’s length. She added there was opacity in business in this space.

Bhattacharya said the money trail in this segment should be clear — who was sending money to whom and for what end-use. The drive for controlling terror funds had resulted in tight regulations and the gems and jewellery sector had to learn to adhere to these, she said, adding stringent reporting requirements were here to stay. The global financial meltdown of 2008 had led to a sharp fall in demand for diamonds and jewellery products.

Also, many Indian companies were on an expansion spree at that time, acquiring new brands and retail chains abroad. Subsequently, however, companies began to default on repayments and this led to ballooning of non-performing loans.

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