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Standard Chartered said to curb its US$2 billion diamond exposure

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Standard Chartered Plc is demanding more loan protection from clients in the Indian and Belgian diamond trade as the bank seeks to tighten standards, according to people with knowledge of the new policy.

[LONDON] Standard Chartered Plc is demanding more loan protection from clients in the Indian and Belgian diamond trade as the bank seeks to tighten standards, according to people with knowledge of the new policy.

After lending about US$2 billion to the industry, the London-based bank is asking diamond-processing clients to get payment insurance or provide 100 per cent collateral, said the people, who asked not to be identified as the matter is private.

"We have been working with clients to find mutually beneficial solutions to continue to bank the diamond industry against a backdrop of increased compliance reporting and regulatory capital costs," Standard Chartered said in an emailed response to questions. "We are focused on generating returns which cover our cost of capital and price accordingly in line with the market."

Though diamonds account for less than one per cent of Standard Chartered's US$261 billion of loans, gemstones haven't escaped the scrutiny of chief executive officer Bill Winters, who inherited a bank reeling from poor lending decisions made during the emerging-market and commodity boom.

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Since June, Mr Winters, 54, has replaced the entire senior management team and pledged to review every business line and customer relationship, ranking their risk and returns, with the aim of restructuring or jettisoning about US$100 billion of assets.

Collateral from diamond clients won't be acceptable in the form of receivables, the people said. Clients that cannot meet the terms may face higher interest charges or won't see their debt facilities renewed, the people said.

The bank has reduced its exposure to commodities by 28 per cent to about US$40 billion, and cut exposure to oil and gas producers, which have been suffering from a record slump in energy prices, by 26 per cent to roughly US$10 billion.

Along with ABN Amro Bank NV, Standard Chartered is one of the biggest lenders to middlemen in the diamond industry. That so-called midstream is dominated by family-run firms that cut, polish and trade stones in hubs such as Mumbai and the Belgian city of Antwerp. These firms are heavily dependent on loans to fund the purchase of rough gems from miners such as De Beers.

The industry has been marred by defaults and bankruptcies since the financial crisis as the small firms over-extended themselves, taking on too much debt amid a slump in diamond prices. De Beers, the biggest seller of diamonds to the midstream, said in 2014 it would require more rigorous auditing of buyers' accounts as the company seeks to direct gems to the most financially sound purchasers.

Now, diamond firms face a dwindling supply of credit as its biggest lenders reduce their exposures, while Antwerp Diamond Bank, which accounted for about 10 per cent of the financing market at its peak, was wound down by its Belgian owner.

"We continue to provide significant capital to the diamond sector, despite other banks withdrawing," Standard Chartered said in the statement. "We are developing innovative solutions and working with clients and insurance providers to increase the sector's access to capital and deliver institutional investor funding."

Rough diamond prices fell 18 per cent last year. Consulting firm Bain & Co has estimated the average cutting and polishing firm had no profit margin last year, compared with profitability of as much as 4 per cent in 2013. Bain said the diamond midstream's debts are likely to total US$13 billion in 2016.

"Diamond banks across the board are trying to de-risk their lending and increase their hard collateral," said Anish Aggarwal, a partner at Antwerp-based industry consultant Gemdax. "Diamond financing is going through a transition period, and the existing model might not work so well going forward."

Standard Chartered's travails in India are not limited to the relatively small diamond sector. Once the biggest national contributor to total profit, the bank's strategy of building Indian relationships by lending directly to large, family- controlled conglomerates has faltered. Managers have internally flagged US$5 billion of loans in the country at risk of default, and the bank has said its pursuing a "more active reduction" of its exposure.