Banking Facilities to Diamond Exporters

 

 

India is famous for diamond processing and the industry earns a large amount of foreign exchange for the country. Export of finished diamonds is on increase and forms an important segment of overall export from the country. Diamond export has some special features in as much as rough diamonds are imported and the same we processed on contract basis by artisans. The labour charges are generally paid after the job is completed and cut & polished diamonds are then exported.

 

Looking into these special features of this industry it is necessary that the assessment of working capital for such units may be done in a different manner so that these units do not suffer for want of bank funds and there is healthy growth of exports. The basic methodology remains the same but some relaxation specially allowed for this industry we highlighted in the following paragraphs.

 

Application of 2nd Method of lending

 

2nd method of lending is uniformly applicable in respect of diamond exporters.

 

Norms / broad indicators for Inventory & Receivables

 

Diamond exporters need finance to make advance payments for import or local purchase of raw materials viz., rough diamonds and to hold stocks in process and finished diamonds pending sales thereof. Post‑shipment facilities are also necessary to support the sales. The norms prescribed by Reserve Bank of India have since been abolished. Reserve Bank of India has however, given broad indicators for the levels of inventories & receivables. The banks are however free to determine the levels on case to case basis. The broad indicators of Reserve Bank are as given under:

            Raw material &           Finished          Receivables    Overall

            Stack in Process           Goods

 

For DTC Sight holders                   3.5 months                1.00 months      3 months           * 7.50 months

For non DTC Sight Holders              3 months                 1.00months       3 months           * 7.00months

 

Consortium Arrangements

 

Finalisation of consortium arrangement is necessary for all borrowers under this category who are enjoying fund based credit limits of Rs. 50.00crores or more. Even in cases where formation of a consortium is not necessary and them exists a multiple banking arrangement, formal meetings of all the financing banks is required to be held once in three months to exchange information on the borrower and to review the overdues, if any.

 

Packing Credit in Foreign Currency (PCFC) and running a/c facility

 

Diamond exporters are eligible to avail packing credit in foreign currency and also running a/c facility under PCFC as per guidelines issued by Reserve Bank of India in this regard. Full details of PCFC scheme and running ale facility have been given in a separate chapter on 'Export Finance'.

 

Assessment of Working Capital

 

Special forms I to III under Credit Monitoring Arrangement (CMA) have been prescribed for proper assessment of need based credit requirements of diamond exporters. Other forms are the same as applicable to other borrowers. Diamond exporters may also enter into multiple banking/consortium financing as per general procedure in this regard.

 

Besides submitting statements under the 'Quarterly Information System' the diamond exporters will also be required to submit a monthly statement containing the following particulars

 

(i)   Current assets.

(ii)  Borrowing arrangements and outstanding.

(iii) Bank‑wise position of stocks hypothecated showing separately the quantity and value of stocks held by the borrower in the form of imported roughs, roughs under processing and fully processed gee& (cut & polished diamonds) pending sale.

(iv) Quantity and value of goods held by the contactors on behalf of the borrower for processing.

(v)  Export sales performance achieved during the 3 months preceding the date to which the statement relates, so as to enable the bank to watch the trend. If wide variations m noted, masons therefore should be clearly stated.

Performance of special form I to III are given as Appendices 19.I to 19.III.

 

Embargo on Import of Conflict Diamonds

 

Trading in conflict diamonds has been banned by UN Resolution Nos. 1173 and 1176. With a view to ensuring no support is extended to any trading in conflict diamonds and the legitimate trading in non‑conflict diamonds is not affected, an undertaking is to be obtained by banks from the clients who have been extended credit for doing any business relating to diamonds (see Appendix 19.IV).

 

1 [As per new UN mandated Kimberley Process Certification Scheme (KPCS) which has been adopted, among others, by India. it has to be ensured that no rough diamonds mined and illegally traded enter our country. Various measures have been taken in this regard including a system of import into India of diamonds being mandatorily accompanied by Kimberley Process Certificate (KPC). Similarly, the exports from India would also be accompanied by the KPC to the effect that no conflict/rough diamonds have been used in the process. These KPCs would be verified /validated in the case of imports/exports by the Gem and Jewellery Export Promotion Council, which has been designated, under the KPCs, as Importing/Exporting Authority by the Government of India. It has therefore been decided that banks should obtain a modified undertaking as per format given in Annexure 19.IV, from all the clients who am being extended credit for doing any business relating to diamonds to ensure that the client complies with the KPCs guidelines. The existing system of prompt reporting to RBI of any violation of UN Resolutions as and when noticed as laid down in above circular would continue.]

 

APPENDIX 19.I

 

FORM‑I

Particulars of the Existing Limits from the Banking System

Limits from all banks and financial institutions as on a date near to the date of the application                                                                                          (Amounts ‑ 000's omitted)

Name of Bank/

Financial Institutions

Nature of

facility

Existing

limits

Extent to which were utilised

during the last 12 months

Maximum                  Minimum

Balance outstanding

as on

(Date:......................)

(1)

(2)

(3)

     (4)                             (5)

(6)

           

A. Working capital limits

1.

            2.

            3.

            4.

            6.

            7.

B. Medium term and long term loan; (excluding working capital term loans) and deferred pay­ments credits

            1.

            2.

            3.

 

NOTES:

 

(i)         Information to be given separately in respect of each of the credit limits under short term loans (for working capital), cash credits/overdrafts, export credit, working capital term loans (i.e. loan created out of the 'excess' borrowing identified under the relevant method of lending to make up the deficit in the networking capital), bills purchased and discounted, medium term and long term loans, deferred payment, credits etc.

(ii)        In this form, details of credit limits available to the borrower from the entire banking system, including ad hoc limit /casual borrowing and also those from die term lending institutions should be given.

(iii)       Maximum and minimum utilisation of the limits during the past 12 months and the outstanding balance as on a recent date should only be given; month‑wise figures need not be given.

(iv)       In the case of term loans, only the original amount of each loan and the present balance outstanding should be indicated in columns 3 and 6 respectively.

(v)        If there are large unutilised limits, the reasons therefore should be given.

(vi)       In case of post‑shipment credit the specific sub‑limits against COD export and D/A export should be specified.

(vii)      DA Import LC limits ‑ bank guarantee favouring MMTC etc. for credit purchases, if any, should also be specified.

 


 [M1]As a general practice in the diamond trade, labour charges for processing are paid after the job is executed. The stock‑in‑process is, therefore, valued only on the basis of raw materials cost.

 [M2]As a general practice in the diamond trade, labour charges for processing are paid after the job is executed. The stock‑in‑process is, therefore, valued only on the basis of raw materials cost.

 [M3]Inserted by Circular No. IECD 13/04.02.02/2002‑03, dt. 3.2.2003.