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Scam Fallout: SBI Tightens Lending, RBI Disallows Price Risk Hedging

The Indian gem and jewellery industry has taken a double hit as first the State Bank of India (SBI), one of the largest diamond financing banks globally, tightened its lending norms to the industry by asking for more collateral, and then the Reserve Bank of India (RBI) disallowed the hedging of price risk in gold, gemstones and diamonds.

Both developments are a result of the nearly $2 billion scam at the Punjab National Bank (PNB) perpetrated by diamantaires Mehul Choksi and Nirav Modi.

While SBI Chairman Rajnish Kumar had stated last month that the banks exposure of ₹13,000 crore ($2 billion) to the gem and jewellery industry was less than 1 percent of its ₹16 lakh crore ($246.6 billion) dementing lending, the bank’s board nevertheless asked for the gaps in risk mitigation to be plugged — especially where the gem and jewellery industry was concerned.

The bank formerly gave loans to gem and jewellery companies on the furnishing of collateral of between 10 and 15 percent. It is now asking these companies to either infuse more capital into the business or put up higher collateral. The bank also wants these companies to submit a plan on how they will repay the loans.

Meanwhile, the RBI issued new guidelines for ‘Hedging of Commodity Price Risk and Freight Risk in Overseas Markets’. The new guidelines include all commodities except gold, gemstones and diamonds, whose price risk can be hedged in the case of direct exposure. Commodities whose price risk can be hedged in the case of indirect exposure include aluminium, copper, lead, zinc, nickel, and tin.

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