The Reserve Bank of India’s decision to ban the issuance of letters of undertaking (LoUs) or letters of comfort (LoCs) as a trade finance instrument is not likely to have any impact on the gem and jewellery industry in West Bengal.
According to Pankaj Parekh, former Vice-Chairman of GJEPC, and Regional Chairman, India Bullion and Jewellery Association, the instrument is used by some jewellers primarily for imports. However, a majority of the jewellers in Bengal manufacture their own jewellery and there is hardly any import component.
“There will be no impact of the ban on jewellers in this region,” Parekh told newspersons on the sidelines of a press conference to announce a three-day international jewellery exhibition in Kolkata starting January 12, 2019.
However, bank lending to the gem and jewellery industry may be ‘squeezed’ in the wake of the almost ₹13,000-crore scam involving billionaire diamantaire Nirav Modi. Banks have already started demanding higher collateral from existing borrowers, he said.
“They are wanting more collateral or asking us to reduce the loan amount,” he said.
But this would hurt only those entities which are highly dependent on bank finance. In West Bengal, a majority of the jewellers are small and medium-sized entities, with only 10-15 per cent exposure to bank finance, he pointed out.