Gold necklaces sit on display at a Chow Tai Fook Jewellery Group Ltd. jewelry store in Hong Kong, China. (Photographer: Billy H.C. Kwok/Bloomberg)

Jewelers Find Exports Tough as India Bank Fraud Squeezes Credit

(Bloomberg) -- India’s jewelry exporters expect tighter lending to douse any recovery in overseas sales this year, stoking fears that buyers will shift to rivals China and Thailand.

In the nine months since India’s biggest bank fraud came to light, jewelers have struggled to get credit to run their businesses. Borrowing costs have risen as the $2 billion banking fraud allegedly perpetrated by diamantaire Nirav Modi unraveled and the central bank stepped in, banning short-term financing in foreign currency to limit the damage to the financial system. The fallout from the fraud has been worsened by a debt crisis at a local lender.

Just last week, New Delhi-based PC Jeweller Ltd. said it plans to reduce exports by almost a quarter this financial year as it wants to avoid sales from the mainly credit-based segment. India’s gem and jewelry exports, which account for 16 percent of the country’s total merchandise shipments to global markets, have already fallen about 2 percent in the seven months to October, according to the Gem & Jewellery Exports Promotion Council. That’s after they declined 5 percent in the year ended March to $41 billion.

Jewelers Find Exports Tough as India Bank Fraud Squeezes Credit

Exports may not grow this year with shipments hovering near last year’s levels, according to Colin Shah, vice chairman of the government-backed council that represents about 6,500 exporters. The banking crunch has worsened as lenders have become negative on the sector, he said.

“Nowadays banks are looking at every application and renewal with two magnifying glasses,” Shah said by phone. The challenge to get credit, coupled with difficulties in doing business after India rolled out a new nationwide tax last year, may lead to many job losses in the next two quarters and business may shift to China and Thailand, he said.

Companies polishing and trading diamonds depend on short-term finance to purchase rough stones, which are sold at a profit to repay the loan. A white paper to aid financing for the industry was submitted in May by the council to banks and the government requesting among other measures that bankers should not reduce their current credit limits as this would further erode exports.

“This industry is a working-capital intensive industry and there is huge amount of inventory. So if the needs are not met then it is going to disturb the industry,” Vipul Shah, managing director of exporter Asian Star Co. Ltd., said by phone. “Liquidity is going to remain tight for some time as it will take time to regain the trust of the banks.”

The squeeze on credit has been spreading across the country making life difficult for jewelers, who are even holding back on expansions locally, according to Nitin Khandelwal, chairman of the All India Gem and Jewellery Domestic Council, a national trade federation.

“Banks are asking jewelers to reduce their credit limit and exposure,” he said by phone. “I fail to understand why when this is the biggest employment generating industry and contributes 6-7 percent to the GDP.”

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