RAPAPORT… Summer has brought some warm winds of change to India, as indicated by headline-making news on bank credit changes and diamond smuggling arrests. In the banking news, the Reserve Bank of India (RBI) reduced the term for its letters of credit extended to finance diamond trade to 90 days from as long as one year. The change is designed to curb abuses by borrowers who were using their lines of credit to finance other activities and investments. In the second major news story, the Directorate of Revenue Intelligence (DRI) arrested two diamond traders for allegedly smuggling into Surat approximately $2 million of Zimbabwe diamonds that did not have Kimberley Process (KP) certification.
Behind The Headlines
Reacting to the RBI announcement, Sanjay Kothari, vice chairman of the Gem and Jewellery Export Promotion Council (GJEPC), said, “A lot of undue advantage was taken by some of the industry players, who were securing diamond trade credit from the banks, which they then used to support their other interests. With the reduction in the term of the lines of credit, there will be more discipline in the industry.” Vasant Mehta, past chairman of GJEPC, added that the move “is going to help the genuine exporters and we all welcome this decision.”
To explain the banking change, a rough diamond importer initially opens a line of credit against a fixed deposit with a local bank, which is essentially a guarantee that if he fails to pay the supplier, his bank will make the payment. As soon as the foreign supplier’s bank receives the line of credit, it dispatches the goods to the importer’s bank, which then releases the diamonds to the importer based on the payment received. To pay the overseas supplier, the importer takes out a loan from an overseas bank, which he can get at interest rates that are up to 6 percent less than what he would pay for the same loan at a local bank. This foreign loan is given to the importer against a guarantee from the local bank that has the line of credit with the trader. Traders reportedly were taking advantage of the long credit line term by reinvesting the proceeds from diamond sales and collecting higher interest for the money on deposit than they were paying on the money that had been advanced.
The case of the illegal rough diamonds being smuggled into Surat has received international attention. It is the second smuggling case in the city in three years. Kothari said the arrests send a warning signal to people indulging in such activities to take a step back. “We completely support the DRI in this operation and we strongly believe that the guilty need to be punished,” he said.
Members of the Indian diamond industry are complaining that the recent 30 percent to 40 percent rise in the price of the rough has further disturbed the demand-supply chain, is unsustainable and must be brought under control. Kothari insisted that the situation right now is nowhere close to what it was in 2007/2008 and the industry has no reason to worry.
Encouraging Design
GJEPC announced yet another step in its efforts to strengthen jewelry design in India to make it more consistent with international standards. In association with India’s National Skill Development Corporation (NSDC), GJEPC invited candidates skilled in jewelry manufacturing to participate in the 41st World Skills Competition 2011 in London. The competition attracts approximately 1,000 participants and includes a wide variety of skills.
In other news, the Indian government announced the appointment of GJEPC’s Mehta as a part-time director on the board of the Export Credit Guarantee Corporation of India Limited (ECGC). His appointment falls in the category of nonofficials connected with exporters and is for a period of two years. “I am happy that the government has included an appointment of someone from the diamond industry as this is going to help the industry in many ways,” said Mehta. ECGC was established by the government of India in 1957 to strengthen the country’s efforts in promoting exports by providing insurance against the risks of exporting on credit. In addition to providing credit-risk insurance coverage to exporters against loss in the export of goods and services, the ECGC also offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them.
Market Dynamics
In a conversation with Rapaport Diamond Report, Rajeev Sheth, chairman and managing director of Tara Jewels, commented on the different preferences domestic and international customers have in diamond jewelry. “In our experience, internationally, buyers mostly focus on jewelry made in 10 karat or 14 karat with I1 and I2 to SI quality diamonds. In our view, the hottest sellers are rounds and princess cuts. In India, we believe customers look at jewelry made in 18 karat and 22 karat with VVS1, VS1 and SI1 quality diamonds. We have experienced that round cuts have the most off-takes besides some princess cuts. The diamond clarity preferred by Indian consumers is G to H and J to K.”
The Marketplace
- Overall activity in the market remains at lower levels due to summer vacation.
- Prices are strong for -2 and stars in the local market.
- Shortages of goods are being felt across the board.
- Demand is strong for SI goods.
