Dec 13, 2014

Bankers Lay Down the Rules for Transparency and “Bankability”

Giving the opening remarks to the banking segment on the second day of the World Diamond Conference, industry analyst and writer Chaim Even-Zohar began by declaring “In 2015, India will start its Golden Era. This is the message from this conference. This is the truth.”

Even-Zohar went on to present a quick overview of the financials of the diamond industry, where he pointed out that the balance sheet of the manufacturing industry as a whole showed that little or no profits were being made, with some years actually showing a negative profit scenario.  

He remarked rough suppliers gave no credit to their clients and that the middle segment was carrying the entire burden of credit to the industry.  “The Bain report says that the middle level of the pipeline will need to be financed both from the top end and the bottom end.”

 “Industry growth has been entirely fuelled by bank borrowings,” he said. “Diamantaires in India are lucky, they have 40 banks. There are only five in the rest of the world, financing this industry.”

Erik A. Jens, CEO, ABN Amro  dwelt at length on the 1863 document “Advice to Bankers” by Hugh McCulloch, then US Comptroller of Currency, and later US Treasury Secretary.  Jens emphasised the soundness of the principles encapsulated in the document – which makes interesting reading -  are  relevant even today, as they were when Wall Street reprinted them in 1933 – when the Great Depression of the US hit rock bottom.

“The sum of profitability and transparency is equal to “bankability” for us,” he went on to say. 

Jens went into accounting and corporate areas and outlined how companies could work at achieving transparency. They should also follow Best Practice Principles he felt.

He, too, felt that the middle segment was burdened with holding the debt of the pipeline which was creating problems and called for a study into “how  to spread the debt burden throughout the pipeline”.

He felt that the few elements within the industry who were tarnishing the sector. “Industry bodies should monitor their members and take action against the bad elements and on the other hand reward those who are  compliant and transparent.”

He added “It is not enough to just talk about Best Practice Principles, you must live them if you are to be a sustainable industry.”

He stressed that his bank expected the strictest compliance with KP. He also felt that it was good for companies to invest in brands. “That is what we look for - commitment, a long term approach,” Jens said.

It was his view that the industry did not need more financing; rather it needed more liquidity.

“The future is yours,” he concluded. “We would love to be a part of it and look to our clients to make it happen.”

Kishore Lall, Global Head, Gems and Jewellery, Standard Chartered and N. K. Chari, CGM, State Bank of India both made brief comments as well.

“Transparency is essential,” stressed Lall. “Banks must ensure that transactions are bonafide and real transactions.”

Lall explained that bankers were in the risk taking business and can  accept that things do not turn out as expected or don’t go well for a particular company or business. “What is not acceptable is that the transaction was not bonafide from the outset and it was not a third party transaction” he said firmly. “That creates an emotional backlash for the bank and has a negative impact on the sector as a whole.”

Chari emphasised that this industry is based on trust and would continue to be based on it. However, he felt that in the current situation, Mazal U’Bracha  should be accompanied by a little more. “Changes and compliances have to be accepted and to be absorbed.”

Both Lall and Chari emphasised that the great majority of the diamond industry was founded on good practices and were pursuing their businesses along lines expected by banks. However, a few rogue elements had  damaged the image and reputation of the industry and led to bankers losing trust in the sector.

“We bankers do not handle such situations well,” explained Lall in response to a query by Even-Zohar as to how a bank reacted when there was an NPA or if any other malpractice was discovered. “When  a bank finds that something is wrong with one of its clients, we should actually rely more on the good clients. Rather, what we tend to do is shy away from the sector as a whole.”

What emerged clearly from the entire session is that we are moving into a world where corporatisation and transparency are going to be key.  

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