Six months after diamond merchants' loans turned bad, banks are likely to recover only a small portion as securities pledged with them may be less than a fourth of the loan value of a few thousands of crores. According to two bankers privy to the matter, only Rs 400-600 crore out of an estimated Rs 1,800 crore-2 ,500-crore bad debt may be recovered after liquidating the securities pledged by a dozen defaulting companies.

The major chunk of the loans may probably have to be written off, said the bankers, causing dismay among some industry officials who said simply writing off a loan would set a wrong precedent in the industry .

Apart from the cash margin – which the borrower has to put up for the comfort of the bank – export receivables and inventory , collaterals include factory and resident premises and fixed desposits. "We are in the process of liquidating the pledged security and may recover around 20-25 % of the loaned amount from the defaulters ," said one of the bankers .

"The diamond merchants' margin for availing the loans was less than a fourth of the loan amount, making it difficult for banks to recover the remaining portion of the loan," said the other . Both bankers spoke on condition of anonymity as they were not authorised to speak with the media. RBS and SBI and its associate banks have a major exposure to the diamond industry. Officials from both these banks were unavailable to disclose the amount recovered from the defaulters so far.

At least 12-13 cases of loans to diamond exporting companies turned bad as these were raised against bills of export to fake overseas buyers. This was reported by the media, including this newspaper, in October last year. It transpired that these overseas buyers were related to the exporters, who, in some cases , kept circulating the same set of diamonds to shore up their balance sheets and access more working capital from the banks.

Normally, while giving a loan after proper due diligence, a bank asks the borrower to put up 25% of the amount as a margin to safeguard itself against a fall in the value of the asset created through the loan amount. Apart from this, lenders have a lien or a charge on the export receivables and the inventory, which includes diamonds, and may also have collateral security in the form of mortgage of factory premises, residences, etc.

"However," said one of the bankers quoted earlier, "if the borrower has taken a bank for a ride by borrowing against fake exports, there is little or no inventory (diamonds) which the bank can fall back on considering the margin put up is a small amount of the total loan.

It is only when the export is made against a letter of credit or cover from the Export Promotion Credit Guarantee Corporation the loss is smaller." In the case of an LC, the onus for paying for, say, the dia-monds would shift from the buyer to his banker. The silver lining, ac-cording to bankers and industry officials, is that there has been no fresh bad debt as the financial year ended March (FY11) has been one in which companies have profited from rising diamond prices.

"We are witnessing an increase in demand for diamonds and diamond jewellery from China, Brazil , Russia and even the US and supplies ha-ven't kept pace. This has led to a robust improvement in sales and company profits," said Sanjay Kothari, vice chairman of trade body Gems & Jewellery Export Promotion Council (Gjepc).

"However , if banks are serious about avoiding a repeat of last year's happenings, they must act stringently against the defaulters so as to send a clear message that fraudulent practices will not be tolerated."