Millennium Post

Reviving and supporting G&J industry

Reduction in credit limits, restrictive lending norms, and lack of policy support can hurt gems & jewellery industry which significantly generates employment and exports.

What oxygen is to life on Earth, funding is to the business ecosystem. Without adequate funding and enabling policies, the best of businesses can decline and die. The issue assumes added significance when the business in question supports millions of jobs and an equal number of families.

Unfortunately, the bad publicity generated by the wrongdoings of a few unscrupulous businessmen has led to the regulators passing strictures against the entire gems & jewellery industry. As a result, banks are unwilling to lend to the industry or only willing to do so at exorbitant terms.

Employment and Exports

An overview of the G&J industry will help elaborate the present situation. To begin with, India does not have a single diamond mine and yet it is the world's largest producer and exporter of diamonds. G&J exports were $41 billion in FY 2017-18 – 13.5 per cent of India's total merchandise exports. Presently, the G&J sector employs five million workers and plans to increase this number to 7 million by 2022.

Since employment generation has been facing challenges in the recent years, the G&J industry's role in generating jobs for semi-skilled and skilled workers needs to be better appreciated via policy and funding support. The same holds true for exports. Instead, bank finance to the G&J industry is barely one per cent of the overall credit disbursal. Had credit support been better, employment and export numbers would have been higher too.

The credit situation remains as challenging as ever. For example, there is no concession on charges. For a low-margin business, concessions play a pivotal role in making the business viable. Secondly, stringent and unrealistic requirements for collateral security are difficult to manage. Unrealistic conditions may actually lead to diversion of funds for building collaterals.

The ECGC (Export Credit Guarantee Cover), available earlier, stands rescinded. This needs to be reinstated to protect the interests of the trade as well as bankers. Besides, banks have imposed credit limits. Such restrictions should be lifted to facilitate the smooth functioning of business while meeting existing trade obligations.

Moreover, the outlook for the trade has been downgraded. Since LIBOR has increased, the spread in the international cost of funds is low. Therefore, the outlook for the trade should be shifted to 'neutral' or 'growth' for financial costs to become viable. A negative outlook further hurts the industry's prospects, impacting job creation too, among other downsides. It may be noted that the recent defaults were not due to any business failure, but rather because of wrong intent, fraud, and collusion. Even today, favourable growth and robust demand exist despite adverse perceptions and the consequent challenging conditions.

At the same time, it is understandable that popular misperceptions about the G&J industry cloud the banking sector's outlook towards the former. To address these misconceptions, the G&J industry is willing to offer reasonable safeguards and suggestions that allay misapprehensions.

Recommended Safeguards

Towards this objective, the Gem & Jewellery Export Promotion Council (GJEPC) has established its 'My KYC Bank' acting as a centralised single-window facility for industry persons to share and update their personal information vis-à-vis KYC. The Council could prevail upon all members to register under the 'My KYC Bank' to drive better information facilitation and transparency for banks. This data can be shared with trading partners, facilitating processes for banks willing to lend to a company and seeking to instantly access relevant information.

Additionally, the Council can periodically provide critical data analysis on crucial observations of the trade, thereby facilitating the banks' assessment of the industry scenario. A mediation body for informal arbitration could be formed comprising of bankers, GJEPC, and allied stakeholders for finding fair resolutions on NPA (non-performing assets) management, recovery, and disputes.

For collateral security, the quantum could be based on the borrower's credit rating, performance, account operations, industry scenario, and other external factors. Banks could establish a long-term credit risk investigation team for tracking, monitoring, and providing intelligence information about trade members, facilitating informed credit decisions.

The Council also recommends that the Centre and RBI implement an Advanced IDPMS (Import Data Processing and Monitoring System) code for banks, ascertaining that advance remittances can be tracked and multiple payments avoided. Another measure recommended for banks is assessing the limit in dollar terms to insulate exporters from exchange fluctuations in sync with the RBI circular. GJEPC can also be informed about defaulting members and critical information shared periodically, ensuring necessary action can be initiated.

Coming to the government's role in risk mitigation, it can ensure the interest equalisation scheme is extended to the entire industry rather than only the SMEs. Funding should be facilitated for the SME sector as well as smaller manufacturers and traders. The government can also implement the required reforms and incentives to promote the trade, which includes improving the ease of doing business and reducing paperwork. The government should also enable a job-work policy for diamond polishing, which is a global practice. Lack of such a policy has been one of the prime reasons for business moving to China. Finally, the GST Council should consider releasing working capital currently blocked due to GST norms.

Notwithstanding the ongoing challenges, GJEPC is seeking to establish a Jewellery Park in Mumbai in supporting jewellery manufacturers and traders interested in expanding or investing in Maharashtra. By benchmarking itself against Jewellery Parks in nations such as China, Thailand, and Turkey, this could initiate new business ventures and augment existing businesses. Once operational, the Park could generate direct employment for approximately 100,000 workers in Maharashtra.

Taking all these factors into account, it is imperative that the Central and State governments extend all support to the G&J industry for the well-being of all stakeholders, including its workers and dependent families. For the capital-intensive G&J industry, the faster these measures are implemented the better their chances of survival and success.

(The author is Chairman, Gem & Jewellery Export Promotion Council. The views expressed are strictly personal)

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