Diamond traders in a cash crunch

MUMBAI: Squeezed for funds, small and medium diamond exporters are now willing to borrow at a higher spread over the London inter-bank offered rate (libor) to finance their imports of rough diamonds.

The traders are pitching with the commerce ministry and the RBI to raise the cap on borrowing costs to ensure a steadier supply of dollars to them. The dollar loan currently offered to exporters, called the packing credit and foreign currency (PCFC) loan at libor plus a spread of one per cent is used to import raw materials. The diamond industry prefers to access this loan considering that servicing this is far more cost effective than a rupee loan.

���Smaller exporters are finding it difficult to rustle up funds to import their raw materials. In spite of agreeing to pay a higher rate of interest to banks to borrow dollars, the funds are not being made available to us,��� said Sanjay Kothari, chairman of the Gem and Jewellery Export Promotion Council.

The ongoing financial turmoil in US has forced foreign funds to exit the Indian markets, leading to a severe dollar crunch in the last six to eight months. Besides, foreign banks are buying dollars to invest in the overseas non-deliverable forwards (NDF) market. They do this to take advantage of the price differential between the domestic and offshore forex markets. This has fuelled further demand for the US dollar. The demand from oil majors to fund their imports amid hugely volatile oil prices has also dried up dollar supply in the market. Those who have been hit badly are smaller exporters who are being forced to access rupee loans, which are far more expensive.

Till recently, banks were refusing to offer PCFS loans, the industry says. Some banks have assured that they would extend the PCFC dollar-denominated loan. However many exporters complain that this was being delayed. Large cash-rich exporters, however, have an alternate route to raise funds.

Gitanjali Group chairman, Mehul Choksi, said when the dollar was cheap, various banks exhausted their limits. He confirmed that they have approached the central bank to come out with clearer guidelines regarding dollar financing to small and medium exporters.