Effects of Nirav Modi Scam on Indian Economy

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Diamond merchant Nirav Modi and an Indian state-owned lender, Punjab National Bank has been in news headlines for a while now. This banking fraud not only raised concerns about the Indian banking sector but has had and will continue to have devastating effects on overall Indian economy. From bank and jewelry shares to public trust, everything seems shaken. To know more about the effects of this fraud, read here!

More banks rushing to CBI reporting defaults against businessmen

The financial fraud of Rs. 11,400 crore by Nirav Modi triggered the case against Rotomac Global for defrauding Rs. 3695 crore. In the wake of these scandals, banks in India are becoming more conscious and suspicious of their clients, specifically businessmen. Few days back, CBI has received two new complaints of loan frauds from Oriental Bank of Commerce and Bank of Maharashtra. These frauds were either committed a few years ago or involve loans that turned into non-performing assets. About 86% of India’s fraud cases have been advance related. In the case of PNB and 26 other Indian banks, more than 75% of their frauds were advanced related. PNB scandal has given a ‘nudge’ to other Indian banks to look into their own accounts and reveal the frauds if there are any.

Banks and Jewelry sector stocks under pressure

Nirav Modi’s fraud case has not only affected his company and the Punjab National Bank but in fact has impacted the jewelry and banking industry as a whole. Geetanjali Gems shares fell by 18% after the scam was revealed. Along with that, PC Jeweler’s stocks fell by 19.5%, Tribhovandas Bhimji Zaveri by 4.32% and Thangamayil Jewelry by 2%. On the other hand in the banking sector, there were four banks which were directly affected by this scam. Union Bank’s stocks fell by 8.5%, Allahabad Bank’s stocks prices slumped by 11%, axis bank to 4.4% and SBI to 5.75%

Banks shifting focus on compliance and corporate sector

The government of India injected 32 billion rupees in the banking sector to deal with the bad loans a few months before the PNB fraud was disclosed. The state-run Indian banks are really in a bad shape and have highest ratios of bad loans in the world. These economically unhealthy ratios risk availability of loans that are needed for country’s small and medium-sized businesses to help India grow economically and achieve its targets. There are various other problems linked with state-owned banks such as senior positions filled through political appointments, bureaucracy and of course, bad loans. Therefore, banks in India are shifting focus towards compliance and corporate sector. Along with that, Government of India has also revealed its intentions to either privatize the state-owned lenders or shut them down. Privatization might help Indian banks to combat problems existing in state-run banks and hence, lower down their ratios of bad loans to lower down.

Diamond business might shift to Belgium and Israel

Nirav Modi scam has damaged the image of Indian diamond industry in the international market. This is why diamonds merchants in India now fear that diamond cutting and polishing business will now shift from India to Belgium and Israel. It is widely said that 14 out of 15 diamonds in the world are polished in India. It is one of the largest cutting and polishing centre for rough diamonds. However, this shift might take away a part of business from Indian diamond merchants and affect Indian economy to a huge extent. This industry contributes a large figure to the GDP of this country and thus, losing out on traders might affect India’s economic growth, GDP and other macroeconomic aims.

Increase in difficulties for diamond businessmen for getting credit line from banks 

This scam has not only tarnished the image of Indian diamond industry amidst the traders but banks as well. Diamond merchants now fear that getting credit line from banks will now become tougher for them which will further impact their businesses. Even the former president of Surat Diamond Association has said, “Securing bank loans for small diamond businesses may become very tough. The banks have not been very keen to give loans to small diamond units, and with the Nirav Modi scam, credit line will dry down. The government should come up with designated branches that will deal with diamond trade only.”

This scandal has had adverse effects on all of its stakeholders including the Indian government, banking industry, employees of PNB and Nirav Modi’s company and most of all the Indian citizens. FII confidence and public trust has now shaken. Image of India’s state-owned banks and diamond industry is tarnished. Indian banks are under-rated by global rating companies such as Moody’s and Flitch. This list of the consequences of this fraud goes on and on. The Indian economy has just started to see the effects of this loan fraud and these effects are going to harm India to a greater extent.  

Author | Ranu Jain