Ghosts of Frauds Past Haunt Indian Jewelers And Alarm Banks

India’s biggest bank fraud is giving jewelers in India a headache as banks hold back credit from the industry.

Billionaire diamond merchant Nirav Modi. (Source: Nirav Modi/Instagram)
Billionaire diamond merchant Nirav Modi. (Source: Nirav Modi/Instagram)

(Bloomberg) -- In his 50 years as a jeweler, Pankaj Parekh has seen a few scams shake the credibility of India’s $60 billion gem and jewelry industry. The latest multibillion-dollar fraud will give banks the impetus to rein in credit for around 300,000 of his peers, he says.

Already, Parekh’s business has come under increased scrutiny. One lender last week questioned the validity of a recurring expense charged by a gold supplier for 180 rupees ($2.80) on his books, he said.

“To date, not once had my lender asked me about this charge,” Parekh said over the telephone from Kolkata, where his family-run jewelry export business is based. “But now, they are raising queries for everything.”

Ghosts of Frauds Past Haunt Indian Jewelers And Alarm Banks

It’s an unpleasant deja vu moment for India’s jewelers, who are involved in cutting or polishing 12 out of 14 diamonds sold in the world. The fraud estimated at $2 billion at one of the nation’s biggest banks, allegedly perpetrated by jewelry house owner Nirav Modi, is reminiscent of a diamond company that defaulted five years ago, leading to credit tightening for the industry, India’s second-biggest foreign exchange earner.

Willful Defaulter

In 2013, Surat-based Winsome Diamonds and Jewellery Ltd., owned by Jatin Mehta, was declared a willful defaulter by the banks. Winsome and two associate companies, owed banks including Standard Chartered Plc and Punjab National Bank, about 68 billion rupees ($1 billion), and investigations are ongoing. Last year, investigators arrested the owner of jeweler Shree Ganesh Jewellery House (I) Ltd. for an alleged fraud of 22 billion rupees, involving about two dozen banks.

Winsome was a watershed moment for Indian banking as it was the second-biggest corporate default after Kingfisher Airlines at the time, prompting lenders to put the gems and jewelry industry in the high-risk category and reduce credit to the segment. According to the latest central bank data, Indian lenders have a combined exposure of about $11 billion to the sector and only 2.9 percent of that amount was deemed a “bad loan”.

“After the Winsome episode happened, the industry’s confidence levels were hit and the banking industry had almost zero confidence in the sector,” said Vipul Shah, managing director of exporter Asian Star Co. Ltd., by phone from Mumbai. The industry, mainly made up of businesses with more than two people, found it difficult to get financing five years ago, and will face similar pressures again now, Shah said.

Round Tripping

Banks have become very cautious over the past two weeks about lending to the segment, and steps are being taken to ensure that credit is given only to genuine exporters and not those engaged in so-called round tripping, which involves importing and exporting the same consignment repeatedly to benefit from lower interest rates on loans from banks, according to people familiar with the matter.

Bankers are reviewing all diamond and jeweler-related accounts and in some cases are seeking more collateral and extra documentation, they said.

Shah, who was the chairman of the government-sponsored Gem & Jewellery Export Promotion Council during the turbulent period following the Winsome default, said that the industry had a tough time restoring the banking industry’s confidence.

Trust-Based Industry

“The diamond business is entirely based on trust,” he said. “Now the trust factor is gone. How to make sure that something like this doesn’t happen in the future?”

Globally, companies polishing and trading diamonds depend on short-term finance to purchase rough stones, which are sold at a profit to repay the loan. Fewer banks are willing to provide that service.

In 2016, Standard Chartered, then one of the two leading lenders to the industry, said it was exiting its $2 billion diamond financing business, while KBC Group NV’s Antwerp Diamond Bank, which made up about a 10th of the financing market at its peak and served the industry for 80 years, is being wound down.

Ghosts of Frauds Past Haunt Indian Jewelers And Alarm Banks

India exported $43 billion worth of gems and jewelry in the year ended March 2017, accounting for about 16 percent of the country’s total merchandise exports, according to the trade body.

“This is a very sorry situation when we are trying to be the world leaders in the jewelry field and these kinds of things happen,” Shah said. “It will disturb the business.”

With bank credit expected to tighten, production is estimated to decline hitting exports and may even lead to job losses, according to Pravin Nanavati, owner of Surat-based SHE Jewels and a former president of the Surat Diamond Association. “There is no other entity that can lend the huge sums that the industry needs,” Nanavati said.

‘Mind-Boggling’ Fraud

While the industry is not to be blamed for the debacle, as it is an isolated instance of misuse by some individuals, the sheer scale of the money involved in transactions makes it vulnerable to such incidences, said Anoop Mehta, president of the sprawling 20-acre Bharat Diamond Bourse in Mumbai that houses the bulk of the gem and jewelry exporters in the city.

“The magnitude of the fraud is mind-boggling,” said Mehta, who has been working in the sector for nearly four decades. “One is shocked, but at the end of the day, to put the whole thing on the industry is ridiculous. But if I go to Punjab National Bank today and say I want to enhance my limit, I know he is in no mood to do it. It is unfortunate.”

Ghosts of Frauds Past Haunt Indian Jewelers And Alarm Banks

The Punjab National Bank in its complaint to the federal investigation agency -- the Central Bureau of Investigation -- alleged that the fraud was led by Nirav Modi. The bank claims they used fake PNB guarantees to obtain loans from the overseas branches of Indian banks, claiming to need the cash to import pearls, according to documents made public or seen by Bloomberg. Firestar Diamond Inc., the international business that’s part of Modi’s empire, has filed for bankruptcy in the U.S., blaming liquidity and supply chain challenges, and listed up to $100 million in assets and debt, according to Chapter 11 documents filed Monday in a bankruptcy court in New York.

PNB has also registered a case against Mehul Choksi’s Gitanjali Group of companies for alleged loss of 48.87 billion rupees to the exchequer, according to the CBI. Shares of the jeweler’s Gitanjali Gems Ltd. have slumped 67 percent this month in Mumbai.

“Life is going to be more tough for everyone,” said Rajiv Jain, chairman of Jaipur-based gem stone manufacturing and exporting company Sambhav Gems Ltd. “Somebody may have broken the rules, but the entire industry is going to face the consequences.”

--With assistance from Anto Antony and P R Sanjai

To contact the reporter on this story: Swansy Afonso in Mumbai at

To contact the editors responsible for this story: Jason Rogers at, Jason Gale, James Poole

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