The government is planning to re-introduce the export credit guarantee (ECG) insurance benefit scheme within a month to ease the liquidity crunch in the gems and jewellery sector.

Speaking on the sidelines of the Banking Summit 2019 in Mumbai on Wednesday, P N Prasad, deputy managing director of State Bank of India (SBI), said that ECG insurance would be re-started in a month the gems and jewellery sector.

The scheme will ensure lenders receive their claim amount in case of defaults by importers from overseas. Bank finance, currently applicable for pre- and post-shipment of goods, will be covered by the Export Credit Guarantee Corporation (ECGC). It will guarantee lenders against payment defaults by borrowers.

The gems and jewellery sector has been facing a massive credit crunch following the $2-billion Nirav Modi scam as bankers have shied away from the sector. While proposals for new loans are being put in cold storage, provisioning and disbursement for existing customers have seen extensive cuts. A global economic slowdown has also dampened sentiment, which has led to a massive 15 per cent decline in India’s overall gems and jewellery exports during the April-June quarter.

With an overall exposure of around Rs 25,000 crore to domestic and export-centric gems and jewellery players in India, the SBI has not only tightened paper work for new loan disbursals but also kept overall provisioning for the sector stagnant. ECGC will help ease the credit squeeze for the space, says SBI's Prasad. In fact, the Centre discontinued ECGC benefits to the sector six years ago due to cases of intentional payment defaults against exported consignments.

“For ECGC to succeed, the number of claims should come down. In the last few years, number of claims have shot up sharply. So, the success of ECGC is a matter of concern,” said V G Kannan of Indian Banking Association (IBA).

One single jeweller has claimed default of Rs 10,000 crore which raises questions on credentials of the claimant and transparency in this sector. Experts, however, suggest that the upward limit of the ECGC claim of Rs 100 crore to cover MSME sector should be scrapped.

Pramod Agrawal, chairman of the Gems and Jewellery Export Promotion Council (GJEPC), however, believes there is a need to increase the limit of dollar financing that has been squeezed due to depreciation of the rupee over the last few years.

“Over the past decade, rupee has depreciated 75 per cent. But, the overall banking exposure to the gems and jewellery sector has marginally increased to around $9.5 billion in 2019 from $8.5 billion in 2009. This has squeezed overall credit availability for the gems and jewellery sector. Credit availability, however, remains crucial to achieve the $75-billion export target by 2022 as envisaged by Prime Minister Narendra Modi,” said Agrawal.

Currently, India’s overall gems and jewellery exports are valued at around $33 billion.