News

May 11, 2018

GJEPC Presents White Paper on Risk Mitigation; Proposals Received Positively by Bankers

Both the general spirit of, and many of the specific proposals in, the GJEPC’s White Paper on Mitigating Risks Effectively were received positively by the bankers who participated in the Diamond and Jewellery Financing Summit 2018 organised by The Gem & Jewellery Export Promotion Council in Mumbai today.

Presenting the document on behalf of the industry, Convener of GJEPC’s Banking, Insurance and Taxation Committee (BITC), Sanju Kothari stressed that the industry was keen to address the concerns highlighted by bankers in the light of the recent case of alleged fraud. Explaining that the Paper had been prepared after extensive consultations within the trade and in-depth discussions with a number of leading banks, Kothari said that it was essential for the industry and the bankers to work together so that the current challenges faced by both could be converted into fresh opportunities for mutually beneficial growth.

He then proceeded to elaborate on the Council’s understanding with regard to three major areas of concern – Assessment of Credit Limits, Related Party Transactions and Valuation of Stock, before outlining some of the specific steps that the industry, banks and the government could take to help the industry move forward and take advantage of the positive trends in the global market.

While discussing credit limits, Kothari reiterated that the industry was a low margin and labour-intensive business positioned in the mid-stream of the pipeline. It could only remain viable if the banks were able to provide concessions on charges and not impose stringent and unrealisatic requirments for enhanced collateral security. He made out a case for enhancing credit limits to customers who satisfy norms, reinstating the ECGC cover under WTP which was in place till 2014 and maintaining a Neutral / Growth outlook for the trade.

To help in this process, Kothari said that the Council would undertake to help the banks understand the global industry scenario by providing relevant data and timely analysis, as well as take steps to ensure that all member companies were part of the MyKYC Bank project. The GJEPC also urged the government and the RBI to implement the Advanced IDPMS (data tracking for imports) for banks to ensure tracking of advance remittances. The Council requested banks to set up Credit Risk Mitigation teams to track and monitor intelligence about individual customers and proposed to set up an informal arbitration body with members of the GJEPC, BDB and banks to achieve fair resolution in cases of NPAs.

Explaining why there were such a large number of related party transactions within the industry, Kothari said that India had become a dominant force in the diamond industry accounting for almost 95% of global trade. Manufacturers in India had set up overseas associates for sales, marketing and trading activity, as such an integration of processes across a large part of the pipeline helped them increase profit margins. It also was a safeguard against any manipulation by other middlemen.

Responding to bankers’ concerns that in many cases this system lacked transparency and could lead to diversion of funds as well as hinder recovery in the case of NPAs, Kothari pointed out that the suggestion to route all third party transactions through banks would be cumbersome and costly, besides leading to delays.

In this context the White Paper proposed that for related party transactions, goods could be sent directly to associates to save time and allow the banks 10 days time to get documents accepted and signed by the buyer. This could be treated as a bank transaction while also ensuring ease of business through speedy deliveries.

The paper also proposed setting up of a panel of independent valuers and establishing norms for the periodicity and cost of such an exercise. Use of ERP systems and adoption of appicable accounting standards to meet all reporting compliance norms should also be considered. Kothari frankly outlined the pros and cons of such a system – while there would be a clearer audit trail, there would also be increased costs and time taken by the valuation process.

The Paper concluded by emphasising that all the stakeholders would have to play a role in mitigating risk. While pledging to implement measures proposed in its document, Council also called upon industry members to ensure transparency through MyKYC Bank and other measures as well as proactively discuss potential problems with lenders. Banks should set up special teams to track credit decisions after thorough investigation of each individual case, inform industry bodies about defaulting members and assesss limits in dollar terms to insulate exporters against currency fluctuations. Some steps that the government and government bodies could take were also outlined.

In an earlier presentation, GJEPC Vice Chairman Colin Shah had explained the highlights of the MyKYC Bank project that has been initiated by the Council and the role it could play in helping banks address some of the risk areas when extending credit to the industry. He said that this was an online facility where companies that are members of an approved industry body (such as GJEPC, AWDC etc) could update their KYC information in a one-time process and be issued with a Unique Identification Number. The information provided would be further verified by a back-end compliance team.

The facility would enable sharing of information between prospective partners and help develop best-in-class and consistent industry-wide standards, he added.

Emphasising that the industry had a complex structure and transactions were often complicated due to the different needs of each player and independent verticals, Shah said that the MyKYC would be a key element in ensuring that mandatory compliance norms have been met.

He added that G&J was perhaps the only industry where KYC is a bi-directional process i.e. both the buyer and the seller have to complete the process.

Access to this facility would provide banks with a valuable tool to know the company and also to look at related party transactions.

He, however, pointed out that while this increased transparency did a lot to lower risk for the lenders, they would still need to assess transactions risks independently as the MyKYC Bank did not cover these areas.

Shah said that the GJEPC had taken steps to ensure that the MyKYC Bank was an independent not-for-profit entity and was putting in place an international governance structure which could include representatives of banks and also of international trade bodies.

That all these proposals and recommendations were broadly received in a positive spirit become apparent in the Panel Discussion that followed. The panelits included Shri P.N.Prasad, Dy MD, State Bank of India; Shri Biju Patnaik, Executive VP &  Head- Diamond & Jewellery, IndusInd Bank; Mr. George Abraham, GM-Specialised Industries Group, Emirates, NBD Dubai;  Shri K.K. Taneja, Field GM, Central Bank of India; Shri. M. Senthilnathan, ED, ECGC; Shri. Russell Mehta, MD Rosy Blue India Pvt. Ltd.; Shri. Sanju Kothari, Convener BITC, GJEPC; Shri. Rajiv Mehta, MD, Dimexon Diamonds Ltd.; Shri. Mavjibhai Patel, MD, Kiran Gems and Shri Manoj Dwivedi, Joint Secretary, MoC&I.

While some of the bankers on the panel said that the measures proposed by the Council would go a long way in overcoming many of the challenges faced by bankers if they were thoroughly implemented, some others pointed out that the banks too needed to step up the levels of engagement with the industry, understand the specific internal processes of the business and assess individual clients carefully while extending credit.

There was also a healthy exchange of views about related party transactions and the systems of export credit guarantee. Though there was no clear consensus on what practical steps could be taken in these areas, all the participants felt that the summit had provided an important platform for healthy dialogue.

Industry members on their part stressed that the recent crisis was not caused by business failures and the trade itself was well positioned to grow. They also emphasised that the industry had a large number of SMEs and specific finance packages were required to service their needs as well.

Pic Cap: The panel members with anchor Latha Venkatesh, Executive Editor, CNBC-TV18