Why the Industry Can No Longer Bank on the Banks

Over the last week, the industry was hit with a double whammy, right in the balance sheet: First, Antwerp Diamond Bank announced it was shutting its doors, after owner KBC spent four frustrating, fruitless years trying to find a suitable buyer. It did find one purported purchaser—the Yinren Group—but it was never clear if the Shanghai-based real estate company was up to running a bank, even with a deal that allowed heavy subsidies from KBC. Yinren capped off a half year of enigmatic behavior by seemingly dropping out of the process midway through.

That was followed quickly by reports in the Indian press that Standard Chartered’s diamond division—which has already suffered the lack of founder Anna Martin, and has all but saidit’s not taking on new clients—was cutting back its exposure to Indian comp anies. (SC has not responded to repeated requests for comment.)

UPDATE: Standard Chartered emails: “Standard Chartered is not exiting the diamonds and jewelry business. … We continually review our client portfolio to manage risk proactively.”

The industry has seen a lot of banks either drastically cut back or pack up and leave the industry, including Bank Leumi, Sovereign, and JPMorgan Chase. Others have tightened up terms considerably. We seem to be at a crisis point.

The business is still digesting what all this means, but it could be quite serious. “This has opened up Pandora’s box,” worries Pankaj Parekh, vice chairman of the Gem and Jewellery Export Promotion Council. “There may be a sizable drop in the prices of rough. There may be an a drop in India’s exports, resulting in shortage of ready goods. There could be a stray case of bankruptcies also.” De Beers’ head of commercial development Howard Davies, using some choice euphemisms, said during a banking forum held today that lack of available financing could “drive consolidation in the midstream.” (My report on that forum is here.)

With supply-demand fundamentals strong, why is the industry facing these problems? One banker spelled out the issues: “fiscal evasion, inability to comply with Basel III, inability to produce audited financial statements, Kimberley Process problems, social-political issues, the list goes on.”

Banks—and in particular Standard Chartered, which in August was hit with sanctions by New York state for failing to enact proper controls at its Hong Kong and Dubai branches—are looking to “de-risk-ify,” to avoid taking on clients that might get them in trouble. And the diamond industry, fairly or no, has landed on their radar as a possible trouble spot.  

Clearly, there is a bit of an overreaction here. Most diamond companies are credit-worthy and honest. But the trade has also resisted efforts to bring greater transparency to itself and the supply chain. When I moderated a session on the Diamond Source Warranty Protocol at the JCK show in Vegas two years ago, one of the most enthusiastic endorsements came from a banker in the audience. Schemes like the Responsible Jewellery Council’s chain of custody for diamonds—urged on by governments and NGOs—wouldn’t have solved all the industry’s problems regarding the banks, but they would have demonstrated a much-needed commitment to transparency. When the industry ignores the requests and norms of the outside world, it shouldn’t be surprised when the world starts to turn on it.

JCK News Director