Banks Keep Walking Away and We Must Learn the Lesson

 The Indian market is in the headlines again. This time, because of news in the Indian press that a consortium of lenders to a large diamond firm decided to file an insolvency case against it. A few days later, more banking and lending-related news came out that cast a heavy shadow over the Indian diamond hub.

On August 30, Livemint reported that Bank of India had approached the bankruptcy court against Shrenuj and Co. for defaulting on 22.6 billion rupees (about $32.5 million). 

Bank of India was not alone. It is part of a consortium of 17 lenders that told the Mumbai bench of the National Company Law Tribunal (NCLT) that Shrenuj’s debt had reached 11.13 billion Indian rupees (~$155 million) “turned bad,” and “there is an admitted liability.” To put this in context, Shrenuj is a century old company, well established, with major diamond polishing and jewelry manufacturing operations in India, Botswana, and elsewhere. It was a leading supplier to US retailers, and Simon Golub & Sons was one of their subsidiaries.

Shrenuj is joining a growing list of Indian diamond firms that hit a wall when their outstanding debt could no longer be managed.

A Bloomberg article published a day later reported that Union Bank of India is pulling out of Antwerp and will close its branch within a year. The report quoted CEO Rajkiran Rai Gundyadka as saying that Antwerp did not generate “the expected amount of business, particularly from the diamond sector.” Union Bank of India is joining Israel’s Bank Leumi, which closed its New York City branch on similar grounds, and more recently ABN AMRO’s departure from Dubai.

According various sources, bank financing of the diamond industry shrank by 16%, from a record $16.5 billion in 2014 to an estimated $13.5 billion in 2017.

The financing squeeze is hurting the diamond industry, which relies heavily on financing to run daily operations. Some argued, as we did, that the industry is over reliant on the banks, with many firms being over-leveraged to the point that their entire operations, from manufacturing to sales and pricing, are focused on servicing their bank debts. In that regard, the shrinking supply has a positive aspect to it.

On the downside, let’s not kid ourselves that the decline in bank financing was simply a result of an industry slowly becoming healthier, weaning itself off available cash. The shrinking bank debt is a direct outcome of banks’ reservations about the diamond industry. Banks continuously view the industry as a problematic sector. Defaults, misappropriation of funds, and other legal issues have turned the appeal of yesteryear into apprehension. 

After the Modi case exploded, established Indian companies stated that banks continued to supply them credit as before. That was to say, as long as you are in good standing and a serious company, all will continue as usual. It was the smaller guys who worried, and indeed they faced shrinking credit. We are now at the next phase. 

More and more Indian diamond traders are reporting that the banks are becoming stricter with them. The banks are less inclined to increase credit, and those that over extend their borrowing are quickly requested to close the gap. The result, not surprising, is that in their need to generate cash quickly, these firms sell polished diamonds at very attractive prices – read: much lower prices.

This has a far-reaching impact on the industry. As buyers hear of the offered discounts, they flock to the pressed companies and buy from them, forcing other companies to lower prices as well. It is not a snowball effect, at least not yet, but prices in the market are currently soft.

I do not want to stand here and cry ‘wolf’ once again, but there is no choice. There is a major threat to our livelihoods, and we need to drive home the understanding that we need to radically alter our standing. I do not want to see an overflow of available cash, as much as a reasonable supply that will allow us to grow and sustain our businesses. For that to happen, we need to up our game and start acting cautiously with the funds we receive, and treat the trust bestowed on us with an equal amount of honest playing. Otherwise, the banks will drop us like moldy potatoes, and where will that leave us then? 

The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.