New Delhi: The Nirav Modi-Punjab National Bank (PNB) scam has brought to light a host of banking frauds in the country.
Diamond merchants, many believe, have been operating in the grey for years now. Add to that the falling global demand for diamonds and traders have taken to dealing in dubious ways to stay sustainable.
According to credit rating agency CARE, global demand for diamonds has seen a steady dip since the first quarter of 2016. With 90% of the world’s diamonds being cut and polished in India and China, the weak demand has adversely affected traders.
Profits are falling and merchants have been offloading their inventories at low prices. With their books in the red, these businessmen have been inflating balance sheets by distributing diamond consignments around the globe.
As one consignment shows up in different books, it gives the impression of multiple orders doing the rounds. The term used for this bogus trading — Pudiya Ghumao (passing the packet) or round-tripping.
Talking to News18, a diamond merchant in Surat explained the process. "In order to inflate my books, I create shell companies in other countries. My business in India exports a consignment to one of the shell companies and takes a loan from Indian banks showing that sale. The shell company then takes a loan from either foreign banks or from foreign branches of Indian banks to buy the jewels. For the businessman, that is two sources of loans, while the product is still with him," the trader said on the condition of anonymity.
This artificial trading is said to be an open secret. The banks know, other traders know and even the government seems to have turned a blind eye towards it.
In 2012, to curb these practices, the UPA-II government was the first to set a two percent import duty on polished diamonds. The current government, during the 2018 Union Budget, increased the number to five percent.
"These restrictions did, to an extent, curb the practice but those who have been involved in this corrupt practice for long were still given loans to cover their base. The banks did so because they did not want the businesses to turn into Non-performing Assets (NPA),” the trader said.
These 'legacy' traders kept on taking larger loans and inflating their books as banks would give them targets to achieve for the corresponding year of them taking the loan.
This loan-on-a-loan policy is what led to the biggest banking fraud in the country.
Talking about the Rs 11,360-crore scam, the diamond merchant said, "The media, and subsequently the people, came to know about Gitanjali Gems just last week. We, the traders, have known about them for five years. We knew the skeletons could tumble out any day."