While the Indian diamond industry is under pressure as weak rupee has reduced domestic retail demand and tight credit limiting purchasing power and export finance, there is yet another problem lurking for the diamond manufacturers in Surat: defaults and bankruptcies.

In the past three months, diamond manufacturers in the city are believed to have lost Rs 250 crore in the total defaults worth Rs 350 crore by the traders operating from diamond markets in Mumbai and Surat.

Industry sources said that after the tough market situation, default fears have dampend the sentiments among the diamond manufacturers. About 90 per cent of the defaults come from the fly-by-night operators - diamond traders who enter the market during the peak and wither away in the tough market situation - in Surat and Mumbai. These operators take advantage during the recession and wait for the mediators to settle their case for 30-40 per cent less of the defaulted sum.

Dinesh Navadia, president of Surat Diamond Association (SDA) told TOI: "Deals worth crores of rupees are sealed between the diamond merchants and the manufacturers on a paper chit. The diamond industry runs on trust and faith and that there are many fly-by-night operators and scammers responsible for spreading widespread fear and mistrust in the trade."

Navadia added, "Unlike other sectors, the fly-by-night operators do not disappear from the market, but they wait for the mediators for the settlement. Sometimes, they agree to pay only 40-50 per cent of the default amount. The diamond manufacturers cannot even register police complaint as the dealings are done on a plain paper chit and that there are no official records."

Last month, a diamond trader in Mumbai's Opera House defaulted on a payment of Rs 80 crore to diamond manufacturers in Mumbai and Surat. Out of the total defaulted amount, Rs 55 crore belonged to the diamond manufacturers from Surat. However, the trade leaders intervened and that the defaulter agreed to pay 40 per cent of the default amount only.

Market sources said the credit risks are rising fast as the diamond industry slows to a crawl in 2012. Reason: polished diamond prices have declined by almost 20 per cent in the last seven months of 2012 following week rupee and dwindling demand from the domestic and overseas markets like China, Hong Kong and UAE.

"There are certain elements trying to malign the overall image of the industry. We would like to warn the diamond manufacturers to stay away from dealing with such fly-by-night operators in future," said a senior office-bearer of Gems and Jewellery Export Promotion Council (GJEPC) asking anonymity.