State Bank of India is recasting its credit policy to jewellers in the wake of bankruptcies and frauds.
India’s largest lender proposes exposure caps of Rs 100 crore and Rs 250 crore for individual and corporate borrowers, respectively. It plans to lend a substantial part in the form of gold loans, instead of the customary cash credit against stocks — a move that could ensure better monitoring of the end-use of funds but may leave many borrowers with working capital crunch.
According to the proposal, collateral (in the form of cash and enforceable immovable property) would also be raised for poorly-rated borrowers and new customers. A senior SBI official told ET that the credit policy for the gems and jewellery sector is under review. According to Lalit Bajaj, consultant to the gems and jewellery industry, certain conditions being proposed by SBI are not workable.
Besides its experience with errant customers, SBI’s policy review is influenced by characteristics of the gems and jewellery industry —high dependence on imports, volatility in raw material price, reliance on short-term finance for upfront payment to suppliers and customer preferences that are shifting towards machine-made jewellery. SBI’s financing of jewellery would be confined to select branches. Diamond houses are being told to route documents for a large part of the trade through banks, instead of following the age-old practice of ‘direct bills’ where small, but highvalued cargoes, are flown directly to associates or customers abroad. At present, the ‘direct bill’ system enables the industry to save cost.
It is the proposed policy of gold loan (instead of cash) that could impact many jewellers. According to a draft policy from the bank, in migrating to gold loans from the traditional cash credit, permissible limit for each tranche of gold shall be three months’ cost of production for hand-made jewellery and two months for machine-made. Also, gold facility extended for export purposes is to be liquidated from proceeds of the export bills, which are to be realised within a maximum of 180 days. However, it is unclear whether other nationalised or private sector lenders would also take a relook at funding rules for the sector.
While the revised norms would be applicable to new borrowers soon after rules are finalised, existing customers, according to the proposal, would be given time till March 2020 to shift to the gold loan facility.
The industry, however, thinks the rules are too restrictive. “The CC stocks limit should not be fully converted into gold loan, as we deal in other stocks such as gemstones, cut and uncut diamonds and pearls. Besides, it’s a labour-intensive industry. Also, the working capital cycle should be extended beyond six months. Manufacturing, sales and realisation take a long time and a large inventory has to be maintained for display and selection from buyers,” said a person in the jewellery sector.
She also felt the collateral requirements SBI is insisting on may be stifling. “A borrower would deploy more capital in the business rather than create collateral. Stringent rules may even lead to diversion of funds to build collateral,” she said. Indian banks’ gross outstanding credit to the gems and jewellery industry was around Rs 69,000 crore last year.
Courtesy: Economic Times/ Image: Oliveboard