High-flying diamond traders in India, struggling with a slowed industry, have been looking to real estate to recoup losses since 2010.

High-flying diamond traders in India, struggling with a slowed industry, have been looking to real estate to recoup losses since 2010.

Instead of using bank loans to shore up their diamond trade, entrepreneurs have been using the money to purchase speculative real estate properties. But now that real estate is also facing hard times, the traders are in a catch-22 with their lenders.

It isn't often that real estate investments in India are blamed for hurting any other industry. Analysts note that although the diamond industry probably could have used the real estate investment money to improve its bottom line, Diamond World reports India is still ahead of the 2011 general industry performance.

The crisis that has plagued India's diamond industry can be attributed to large and medium-sized firms diverting a total of $5.5 billion worth of loans obtained from Indian banks to the real estate market, reports The Times of India.

"These companies have engaged in speculative buying of rough diamonds and real estate since 2010, but with the real estate market struggling and the drop in prices of rough diamonds, the major industry players are taking significant losses," according to the Israel Diamond Industry Portal based in Ramat Gan, Israel.

The Israel Diamond Industry Portal further cites The Times of India as noting that since the entrepreneurs "were able to obtain financing through cheap loans from banks that extended much credit, the small businesses are the ones who suffer most, since the (diamond) industry is in the midst of a downturn."

"A huge amount of cheap bank finance availed by a few black sheep in the industry is diverted to real estate and speculative deals in rough diamonds since 2010," Sanjay Kothari, the vice chairman of the Gems and Jewelry Export Promotion Council, told The Times of India. "The money is being pumped out from the diamond pipeline and this is creating a lot of problems for the rest of the players."

On a related factor, Diamond World reports Indian polished diamond exports fell 44% in May to only $1.245 billion. In terms of volume, the exports dropped by 50% to 2.574 million carats 

India's exports of rough diamonds also took a hit in May, dropping in cash value year-to-year by 25% to stand at $116.9 million.

The country's import of polished diamonds was slashed by 88% year-to-year, amounting to no more than $194.3 million. Meanwhile, India's import of rough diamonds also fell, dropping 20% from May 2011 to May 2012, equaling $1.135 billion.

As a result, India's net polished exports for May rose by 59% to $1.051 billion, while its net polished imports fell by 20% to $1.018 billion, leaving the country with a net diamond account of $32 million. Diamond World notes this figure was an improvement over May 2011, when a deficit of $603 million was recorded.