Surat, Feb 25: The diamond industry in Surat is hopeful that its business will not be affected adversely if banks tighten the lending norms in the wake of the Rs 114 billion fraud at Punjab National Bank (PNB).
The demand for bank credit from small and medium enterprises (SMEs) involved in cutting and polishing diamonds is likely to go up despite the fraud, industry representatives said.
PNB, the country’s second largest state-run lender, recently detected Rs 114-billion fraudulent transactions at one of its branches in Mumbai.
Gems and Jewellery Export Promotion Council (GJEPC) regional chairman Dinesh Navadiya said out of the 6,000-odd diamond processing units in Surat, only about 100 large firms get borrowings from banks, while SMEs are largely dependent on private financiers.
According to him, the LoU facility is not widely used by the Surat-based diamond processing firms.
Navadiya also welcomed the crackdown on Nirav Modi and Choksi, who allegedly duped the PNB using the LoU facility.
The firms of diamond jewellers Nirav Modi and Mehul Choksi allegedly acquired fraudulent letters of undertaking (LoU) from PNB’s Brady House branch in South Mumbai to secure overseas credit from other lenders.
The LoUs were not recorded in the PSU lender’s books and therefore were undetected for a long time.
“The LoUs are not used much in the Surat diamond industry. I strongly believe that a regular audit must be done in all the banks. It will be good if the banks introduce stricter norms for lending,” he said.
“As of now, we do not see any major impact on the business after the fraud has been unearthed,” said Navadiya, who earlier served as the president of the Surat Diamond Association.
There are around 6,000 companies, including 100 large units, in Surat, he said.
“However, almost 90 per cent of the bank financing goes to those 100 large units only.
The remaining small and medium units are dependent on market borrowings, which is much costlier in terms of interest on the loans taken,” he said.
Navadiya, who also owns a medium-size diamond processing firm and claims to have been denied loan by banks in the past, said banks should also focus on SMEs. Surat is considered as the world’s largest diamond cutting and polishing hub and largely depends on credit for survival, he said.
Every year, the Surat-based units import rough diamonds worth Rs 1 trillion and exports polished diamonds worth Rs 1.58 trillion, Navadiya said.
Echoing views, Surat Diamond Association president Babubhai Gujarati claimed that as compared to the large companies, SMEs hardly default.
“Before this scam, hardly any businessmen in the industry knew about the LoU. I don’t know how it happened,” he said.
“I think banks will definitely double check before giving loans now. In a way, it was also necessary. I believe that banks should now focus on SMEs which, unlike these big firms, hardly default on payments,” said Gujarati, who also owns a processing and exporting unit.
According to another diamond unit owner, Pravin Nanavati, the detection of the fraud and the subsequent crackdown is good for future.
“Out of all the units in Surat, less than 10 per cent are dependent on the bank finance. Thus, even if banks introduce tough measures for the disbursement of loans, it will not have any major impact, as most firms are borrowing funds from the market,” he said.
“Though SMEs form a major chunk of this business, we are still deprived of finance from banks. I think the banks should focus on SMEs, so that we do not have to rely on costly market borrowings,” said Nanavati.