The State Bank of India (SBI), along with a professional committee comprising of over a dozen public, private and foreign banks has begun implementing a number of new measures meant to monitor loans given to the diamond industry more closely.

The committee has been focusing on mitigating risk factors for financial institutions extending lines of credit to diamond industry companies and their affiliates, especially in the wake of the global recession’s impact on the industry.

 

According to various financial media sources, some of the measures being suggested and applied by the committee include encouraging diamond traders to put in place a corporate structure which ensures greater transparency and control over capital movements, routing bills through banks instead of sending them directly to overseas buyers, increasing the collateral provisions and reducing the working capital cycle.

SBI has taken the lead in navigating and curbing financial exposure to the diamond sector. The bank has the highest NPAs in the diamond industry among Indian banks.

“We are seeing how best to insulate ourselves from the risk of financing exports by diamond merchants,” said AP Verma, SBI’s deputy managing director & group executive mid corporate. “From our point of view it is important that partnership firms, which predominate this industry and where lending is based on trust, adopt a corporate structure to ensure greater transparency and comfort for banks, finance bills that have been routed through banks only and raise collateral to possibly 25-30% from the present 10-15%.”

Still, some bankers that the present committee is too loosely structured; advocating a stronger regulatory mechanism, which would be able to monitor the situation even more closely.

On its part, the Indian diamond industry, represented by the Gems and Jewellery Export Promotion Council (GJEPC) is discussing how best to revive banks’ confidence in the industry which till recently was relatively free from the blemish of NPAs.