Banks have cut down their exposure to the gem and jewellery sector amid indications that some jewellery chains in South India are facing liquidity issues a year after the massive defaults by companies owned by Mehul Choksi and Nirav Modi.
According to the Reserve Bank of India data, total loan outstanding to the gem and jewellery sector declined to Rs 85,281 crore as of December 2018 from Rs 90,495 crore in March 2018. Non-performing assets (NPAs) in the jewellery sector also fell to Rs 20,135 crore in December 2018 from a high of Rs 23,887 crore, the RBI said in an RTI reply.
In percentage terms, as much as 23.61 per cent of the exposure of banks was reported as bad loans as of December 2018 against 26.39 per cent in March 2018. After the PNB scam involving Gitanjali Gems of Mehul Choksi and Nirav Modi’s companies surfaced in early 2018, other jewellery companies and chains came under the scanner of banks and the RBI. “Some prominent jewellery chains in the South India are now facing liquidity issues. Their balance sheets are in a big mess. We have cut down our exposure and tightened the lending norms to the sector. We’re assessing their balance sheets,” said an official in a leading commercial bank.
State Bank of India, India’s largest lender, said in the case of non-corporate borrower, the bank decided to cap exposure to Rs 100 crore for single borrower and Rs 200 crore for group exposure. In the case of corporate borrowers, SBI has capped the exposure at Rs 400 crore for single borrower with BBB rating and above, Rs 100 crore for borrower with BB rating and Rs 50 crore for borrowers without rating. SBI has capped group exposure at Rs 1000 crore.
According to SBI, all new exposures beyond Rs 100 crore is to be considered under consortium lending only. If existing exposures are under the multiple banking, it will be brought under consortium lending only.
“No further enhancement will be permitted if the exposure continues MBA (multiple banking arrangement)” SBI said in an RTI reply.
SBI’s total exposure to the gem and jewellery sector was Rs 12,408 crore as of March 2019, out of which Rs 797.59 crore loans were classified as NPAs. While its exposure marginally declined from Rs 12,693 crore in the previous year, NPAs fell from Rs 2,242 crore in March 2018.
“Loan exposures to some gold jewellery retailers in South India are under close scrutiny. Some of them had been on an unbridled expansion spree of their retain chain,” said a senior official of a bank.
Bank lending to the jewellery sector has turned cautious with greater due diligence and checks on credit and inventory qualities. In fact, stricter credit norms have affected the store expansion plans and working capital position of industry players, especially the unorganised ones.
According to rating firm ICRA, the gold jewellery retail business is highly fragmented and competitive; the pricing flexibility of all major players remain under pressure with continuous store expansions by larger retailers in recent years.
This coupled with the limited value addition in the products keeps the operating margins lower. Loan exposure to the sector started coming down after the Rs 14,000 crore fraud by Nirav Modi and Mehul Choksi companies came to light early last year.
NPAs falls to Rs 20,135 cr in December 2018
* Total loan outstanding to the gem and jewellery sector declined to Rs 85,281 crore as of December 2018 from Rs 90,495 crore in March 2018, According to the Reserve Bank of India data
* Non-performing assets (NPAs) in the jewellery sector also fell to Rs 20,135 crore in December 2018 from a high of Rs 23,887 crore
* In percentage terms, as much as 23.61 per cent of the exposure of banks was reported as bad loans as of December 2018 against 26.39 per cent in March 2018