Shady Diamond Traders Taking Banks for a Ride
Source: The Economic Times, Ram Sahgal and M. Padmakshan (10/28/10)
"A small but growing tribe is using trade finance to dress up losses."
The practice of circular trading, known as round-tripping, has raised fears among local diamond manufacturers and banks of an increase in defaults by an industry that was once untouched by bad debt, or non-performing assets (NPAs). However, it is difficult to figure out how much of these losses are due to round-tripping. br>
The industry seems to be getting more vocal following the default of a Rs 850-crore by a Surat-based diamond manufacturer on credit outstanding from a consortium of 14 banks.
Diamond round-tripping denotes the repeated availing of cheap finance against export of the same set of diamonds. The funds are then used to wipe out past losses or shore up balance sheets by recording increased turnover, an important parameter to secure additional finance. Since there is no genuine export in these cases, manufacturers fear that persons resorting to such a practice may run into defaults and tarnish the reputation of an industry that depends on banks for financing import and securing credit.
An apex industry body, Gems & Jewelry Export Promotion Council (GJEPC), is impressing upon banks the need for a stringent risk management system to be put in place to check the malpractice carried out by a 'few black sheep,' and on the government for the need to impose tax on turnover as against on profitability.