Diamond Industry Plans to Reduce Bank Financing by a Third in Response to Waning Global Demand
India’s diamond industry is taking proactive measures to reduce its bank financing needs in light of the declining global demand for diamonds. The industry plans to decrease its financing requirements from $6 billion in FY23 to $4 billion for the current financial year. This decision is driven by the need to manage accounts effectively amidst a challenging market scenario.
Decreased Imports and Transparency in Dealing with Banks
To combat the impact of waning demand, diamond traders have already ceased imports of rough diamonds for a period of two months, up until December 15. This sharp decline in diamond financing was shared during a recent meeting between bankers and major diamond exporters. The industry has now adopted a more transparent approach when dealing with banks, openly discussing the prevailing market conditions and challenges they face.
Learning from Past Experiences
Drawing from their past experiences, the diamond trade has adopted a cautious approach to secure credit lines from banks. Following the ₹13,000-crore Nirav Modi scam in 2018, banks exercised stricter measures and demanded higher collaterals when lending to the sector. However, this time around, the industry has learned from those challenges and is proactively keeping the banking sector informed. They have conveyed their cautious approach to bankers, emphasizing the need to avoid creating excessive inventory given the slowing demand in the US and China.
Precarious Market Conditions and Strategies for Recovery
With a slowdown in affluent markets, significant price falls, and geopolitical tensions, Indian diamond houses, responsible for cutting and polishing nine out of ten stones globally, are aware of the upcoming crucial four months. The decrease in demand in export markets has led to a sharp decline of nearly 35% in the prices of certain categories of solitaire diamonds since January. In anticipation of a market rebound, the trade is banking on events such as Diwali, US Thanksgiving, Christmas, and Valentine’s Day to boost sales and clear the unsold gems.
Focus on De-inventorizing and Adapting to Domestic Market Trends
To revive profitability and restore confidence in the diamond market, diamantaires emphasize the critical role of “de-inventorizing” the diamond chain. Previously, the inventory of larger diamonds ranged from two to two-and-a-half months, but it has now expanded to four-and-a-half months. Similarly, smaller diamonds have seen an increase in inventory to four-and-a-half months. However, there is a positive indication in the domestic market as there is a shifting trend towards diamond consumption over gold in India. The emerging markets, particularly India, are expected to account for a significant portion of global diamond consumption, possibly ranging from 20-30%. Additionally, there is optimism regarding the resurgent Japanese economy, which presents a positive outlook for the industry.
Challenges for Banks and Optimism for Recovery
Although the reduced return on capital has been a concern for banks, there is a positive sign in the diamond industry’s outstanding debt, which has decreased by over 30% since March of this year. However, this poses challenges for banks as per the new Basel Regulation, where they are required to bear the capital cost on the sanctioned limits.
In conclusion, the diamond industry in India recognizes the need to adapt to the current market conditions by reducing bank financing and strategically managing their inventory. By fostering transparency with banks and exploring opportunities in both domestic and emerging markets, the industry aims to overcome the challenges and restore growth and profitability.
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