Already beset by a severe liquidity crunch and battling thin margins and falling demand from the US, the Indian diamond industry is now confronted with the fact that its biggest lender is grappling with business problems of its own. Goldman Sachs analyst Sampath Kumar has downgraded the State Bank of India (SBI) to ’sell’ from ‘neutral’. The SBI is, of course, the single largest diamond financing bank in India and second globally after ABN Amro.

The reason for the downgrade has nothing to do with diamonds. What has happened is that the Reserve Bank of India (RBI), the country’s central bank, unexpectedly raised the lending rate in June and there has been a subsequent drop in loans made by the banks. To add to this, bad debts have been rising and the SBI has also had to set aside more money for provisions.

While diamond loans are made at RBI-sanctioned special export rates, the overall lending attitude of the bank to diamantaires will almost certainly be affected if the bank is in the sort of situation it finds itself in now. We could see some interesting fallout from this downgrade.