The Indian diamond industry’s liquidity crisis – said to be the worst in 50 years – is claimed to be self made as big and medium diamond firms have diverted $5.4 billion in bank finance for diamond operations into real estate, according to a report published in The Times of India.

With real estate prices now falling, these firms are now caught in a crunch. The situation is compounded by speculative buying of rough diamonds over the past two years. Rough diamond prices also declining.

Compounding the problem is the fact that a major part of this borrowing was based on ‘round-tripping’ – the repeated export and import of the same parcel of diamonds to boost turnover and export figures to get low interest finance from banks.

Some diamond firms reportedly used finance obtained from several high-street lenders to dress up past losses on their books.

"The money is being pumped out from the diamond pipeline and this is creating a lot of problems for the rest of the players," the newspaper quotes Gem & Jewellery Export Promotion Council (GJEPC) Vice Chairman Sanjay Kothari.

Calling India’s diamond export figures “false and manipulative,” Kothari said, "The export of $28 billion worth of polished diamonds and the import of $20 billion worth of polished diamonds in 2010-11 was the classic example of round-tripping. India is a diamond exporter and there is no need for importing polished diamonds. This shows how the 'black sheep' have played a trick to misuse bank finance."