RBI’s directive on LoU to hugely impact diamond, jewellery sector

Surat: Diamantaires in world’s largest diamond cutting and polishing centre, especially small and medium ones, are rattled following the Reserve Bank of India’s directive banning the letter of undertaking (LoUs), which was allegedly used by billionaire Nirav Modi to defraud the Punjab National Bank (PNB).
Industry leaders stated that this is going to hugely impact the diamond trade as high value rough diamonds are imported through the banks providing LoUs to their counterparts in Belgium and other parts of the world. Now, the medium players will have to look for private financing from the industry, which could increase the interest burden on the overall cost of diamonds.

Independent diamond industry analyst based in New York Paul Zimnisky told TOI, “This development from RBI is directed primarily at small and medium sized diamond manufacturers and jewellers. There has been consolidation in this industry, especially following the demonetisation and then the new tax regime, so the current situation will just accelerate that process. The result will be a continued shift of market share towards the larger, well-capitalized players.”

Zimnisky added, “So far, the impact on diamond prices has been surprisingly relatively negligible, but I would imagine that it will eventually be felt, especially on secondary market trading. Overall, the situation will reduce manufacture’s ability to over-speculate on diamond prices, which should reduce some price volatility going forward.”
Interestingly, the world’s largest diamond mining company De Beers had adopted aggressive approach few years ago for its rough-diamond buying customers to improve their financial and accounting standards. A greater percentage of larger players in the industry, including that in India, are more equipped to handle a situation like this and should meet the bank’s new lending requirements, stated Zimnisky.
Diamond industry analyst Aniruddha Lidbide said, “Being a capital intensive industry, the diamond industry will be facing challenges on various front. The diamond buying will get impacted due to the banning of LoUs and LoCs. The only option is to get the private finance and that too on heavy interest rates.”
Lidbide added, “Most of the Indian banks lack experts to value the diamond stocks hypothecated against the loans. The diamond companies could show the value of the stock, for example Rs 40 crore in its inventory, but actually it may not be more than Rs 5 crore. Here, the banks will really need to take stock of the situation and start taking risk mitigation measures.”
by via Surat News, Latest Surat News Headlines & Live Updates - Times of India