Banks must understand jewellery sector before funding, says Prabhu

Mumbai: With the gems and jewellery industry being a major source of employment creation, there is a need to have a banking system which understands the sector and supports its growth, without taking any undue risk, commerce and industry minister Suresh Prabhu said.

He urged banks to have proper risk-mitigation mechanisms in place to avoid any potential frauds. "Gold, gems and jewellery and diamond give huge employment opportunities in India. We will like to have a banking system that understands the business properly.

Banks should not take any undue risk which are not understandable and quantifiable," Prabhu said at an event organised by the Gems and Jewellery Export Promotion Council (GJEPC)here on Friday.

The gems and jewellery sector is facing funding issues after the Reserve Bank of India in March banned the issuance of letters of undertaking (LoUs) and letters of comfort (LoCs), used extensively for trade finance, following the Rs 13,000-crore PNB scam involving diamantaire Nirav Modi. Prabhu said the government will not support any business activity which is not ethical and bankable.

"We would like banks to fund everything which is genuine, bankable and has capability to scale up," he said.

Pointing towards the PNB fraud, commerce secretary Rita Teaotia said there is need for an introspection by banks and the gems and jewellery sector.

"The banking sector must also recognise that the reasons for this failure was actually failure of our own banking system," Teaotia said.

"There is no cosy relationships that anyone of us can afford. It has to be business and we have to follow prudent norms," she added.

Meanwhile, in a white paper submitted by the GJEPC to the government today, the council has demanded a turnover coverage from the Export Credit Guarantee Corporation of India (ECGC). The cover from ECGC was available till 2014, but was later sealed.

The council has asked the government to reinstate exposure under whole turnover post shipment (WTP) for banks. Teotia said the government will not give any instruction to ECGC and will like the institution to take a call based on the merit.

"We expect them (ECGC) to operate in a professional manner to go by merits and then based on their ability and then they should support them. ECGC need to take the risk on the sector, but it will not be at the direction of the government," she said.

The commerce secretary also asked banks to focus on the SME sector which are facing funding issues. "We are failing a very significant sector if we neglect the SMEs," she added.