Fallout from alleged diamond-debt fraud continues

London

THE alleged diamond debt fraud in India has severe implications for the global gem and banking businesses.

"We are worried about the ripple effects," a spokesman for the Antwerp World Diamond Centre said.

The main implication is that the Reserve Bank of India (RBI) now intends to raise the regulatory bar. A new committee will henceforth monitor large dodgy loans with suspect and overvalued asset collateral; it will also use IT and demand tighter bank auditing standards.

This more intensive oversight will affect not only the banks that have provided loans to Indian diamond dealers and manufacturers, but other businesses as well.

The scandal is centred on billionaire jeweller-to-the-stars Nirav Modi, who is being investigated for his alleged involvement in a US$1.8 billion loan fraud at the Punjab National Bank (PNB), India's second largest state bank. The Indian federal police have alleged that he and others conspired with several PNB employees to fraudulently obtain advances for paying overseas suppliers.

The jeweller denies the allegations, his lawyer said on Tuesday.

The Business Times had reported last October that Diamond Exchange chief executive Eli Avidor was concerned about the extent of Indian diamond debt. He had estimated then that the debt was at least US$10 billion, but following the US$1.77 billion potential loss of PNB, and the estimated losses of US$1.4 billion by five other banks, the overall debt could be as high as US$12 billion.

But that is not the only problem. The non-performing loans of Indian banks and foreign banks carrying out business with India, going by latest estimates, now tops US$147 billion.

The impact is likely to be two-fold:

Firstly, banks that provided large credit lines to Indian diamond dealers, manufacturers and jewellers will be examining their loan books.

The inevitable result will be tighter credit, an Antwerp dealer predicted. The general complaint by Antwerp and Israeli dealers is that the Indian diamond industry, by far the biggest in terms of the volume of carat purchases, has been in an advantageous position.

Using large credit lines, they outbid other dealers and buy large quantities of diamonds from De Beers, the Russian producer Alrosa, Canadians, Australians and others. If the banks tighten credit, Indian dealers will be forced to buy less, they said.

An Antwerp dealer who did not wish to be named said: "In the short term, diamond miners may well have to sell fewer gems and be forced to cut prices.

"Paradoxically, normalised Indian credit will benefit the industry. Rough diamond prices should stabilise at more reasonable levels and there will be less pressure on the cutters who buy the rough gems and polish them."

The dealer added: "The scandal and its implications are an Indian banking problem. There are tight controls, regulations and credit for Antwerp and Israel dealers."

The Indian diamond market grew rapidly over the years as manufacturers could cut small and semi-industrial stones cheaply. The industry got out of hand following the crash of 2008, when the government persuaded banks to boost credit.

Secondly , the big question is what happens to other Indian businesses who have survived on lax credit. Conditions could well become more difficult, observers say.

Analysts and bankers contend that the extent of the alleged PNB fraud highlight inadequate internal controls at India's state-controlled and other banks. They account for about two-thirds of the country's bank assets. PNB's billion-dollar alleged fraud "is a case of operational risk (due to) delinquent behaviour by one or more employees of the bank and failure of internal controls", the RBI said.

To allegations that Mr Modi and others conspired to fraudulently obtain advances for paying overseas suppliers, Vijay Aggarwal (one of Mr Modi's lawyers) said all transactions with PNB were documented and that the allegations by the Central Bureau of Investigation "were completely wrong".

"Everything is documented," he was quoted as telling Reuters in a telephone interview. Asked about his legal strategy, he said: "Until there is a charge sheet, there is no strategy. When there is a charge sheet, there will be a strategy."

Separately, Mr Modi has accused the PNB of having "jeopardised" his ability to pay the bank back the dues by making the case public, news agency PTI reported.

He reportedly wrote in a letter that his companies owe the bank under 50 billion rupees (S$1.02 billion), much lower than the amount pegged by the bank.

Referring to the companies he owns, he wrote in the letter: "The erroneously cited liability resulted in a media frenzy, which led to immediate search-and-seizure of operations, and which in turn resulted in Firestar International and Firestar Diamond International effectively ceasing to be going-concerns."