Losing The Sheen: India’s Gems Trade Is As Much Under Scrutiny As Its Public Sector Banks

The last few days have been chaotic for India’s public sector banks (PSBs), as the country’s largest corporate fraud has brought their systems, ownership and their very existence under intense public scrutiny. When Punjab National Bank disclosed that jeweller Nirav Modi and his uncle Mehul Choksi had together allegedly cheated PSBs of over Rs 11,000 crore (the figure later escalated to over Rs 12,000 crore), a shocked India looked on, trying to find succor in the arrest and trail of the duo. But of course, they had conveniently fled the country. Modi and Choksi have not only called into question the banking systems in India, their flight has brought attention also on to the once-glittering gems and jewellery trade. The shutdown of the two companies – Modi’s Firestar Diamonds and Choksi’s Gitanjali Gems – will mean an almost three-fold rise in non-performing assets of the entire gems and jewellery sector, according to analysts at CARE Ratings. The sector’s bad loans ratio will go up to 30 per cent from 11 per cent at present.

Not just bad loans, India’s gems and jewellery trade is also expected to witness a drop in exports and loss of jobs. And a possibly worsening exports scenario for India since ‘gems and jewellery’ is the second largest export item from India. Make no mistake – the uncle-nephew duo had a stranglehold over the diamonds and jewellery trade within India as well as overseas and the demise of their respective businesses is already having a cascading effect on the entire trade. Firestar Diamonds derived most of its revenue from its diamond cutting and polishing business. Its diamond sorting business caters to some of the largest players internationally. The company was also involved in the designing and manufacturing of premium-end stone and diamond studded jewellery.

The company operated jewellery stores at New York, Beijing and Hong Kong apart from the flagship stores in Mumbai and Delhi. Meanwhile, Gitanjali Gems was present in both import-export of gold and studded jewellery and retail jewellery business in 200 cities in India and top markets abroad.

The CARE analysts have said that the closure of Firestar and Gitanjali means the size of the gems and jewellery industry gets reduced by a whopping 16 per cent or by a sixth. For 2016-17, Gitanjali Gems declared revenue of Rs 10,464.77 crore and a net profit of Rs 39.72 crore.

And according to this piece, Firestar Diamond Inc, which has filed for bankruptcy, has listed assets and liabilities in the range of $50 million to $100 million.

The question now is how will India’s gems and jewellery trade rise from this scandal? The latest annual report of Gitanjali for 2016-17, says India along with US and China is the largest consumer of gems and jewellery in the world. Along with China, India has been a hub of jewellery consumption; India is a major processing hub for the global jewellery market too. We are also the world’s largest diamond-cutting and polishing centre and second largest gold jewelry centre on the planet. With the Modi-Choksi firms’ closure and their fraud choking financing to the sector and impacting business, will India lose its pole position in the gems and jewelry trade in the world?

The Gitanjali annual report states that gold and diamond jewellery are the two major segments of the industry globally and India dominates in both of them. Of the total diamonds sold around the world, more than 90 per cent (14 out of 15) diamonds are cut and polished in India (60 per cent by value). How will the closure of two of the biggest firms in the sector and associated stress impact the gems and jewelry sector as a whole, remains to be seen.

It would be wrong to assume that Nirav Modi and his deeds are the gems and jewellery sector’s first brush with financial wrongdoing.

As this piece explains, Surat-based Winsome Diamonds and Jewellery Ltd, owned by Jatin Mehta, was declared a willful defaulter by the banks in 2013. Winsome and two associate companies owed banks including Standard Chartered Plc and Punjab National Bank, about Rs 6,800 crore ($1 billion) and investigations are ongoing. Last year, investigators arrested the owner of jeweller Shree Ganesh Jewellery House (I) Ltd for an alleged fraud of Rs 2,200 crore, involving about two dozen banks.

Meanwhile, not only is the gems and jewellery sector in a tight spot, even the exposure of banks to the sector is under intense scrutiny. According to analysts at BNP Paribas, though the total exposure of banks to the sector is just about 1 per cent of non-food credit and 2.6 per cent of system industry exposure, Union Bank has lent the largest amount among all banks, at almost 10 per cent of its net worth or Rs 25,697.3 crore. With Punjab National Bank’s exposure limited to Rs 2,702.8 crore, it is clear that Union Bank has almost nine and a half times the exposure that PNB has to the gems and jewellery trade. The BNP analysts have said that PSBs will likely be de-rated, with the scandal now erupting and their exposures to the sector under scrutiny. SBI has the second largest exposure among PSBs at Rs 17,234.2 crore, followed by Bank of India at Rs 9,459.9 crore.