THE SOWCARPET STORY

JEWELLERY BUSINESS SERIES - EPISODE 6

How Can a Banker Tell This Just by Looking at the Balance Sheet?

You cannot see the fraud directly. But you can see the timing distortion very clearly — if you know where to look.

Think in four lenses, not one.

Lens 1: Advances from Customers vs Inventory (MOST IMPORTANT)

🚩 Red Flag Pattern

• Advances from customers ↑

• Gold inventory does NOT rise proportionately

What this tells you

Money has come in, but gold has not been bought yet.

📌 In genuine jewellery schemes:

• Advances rise → inventory rises (or is hedged)

📌 In Sowcarpet-type cases:

• Advances rise → cash used elsewhere

🔎 Ask:

• “Where is the gold corresponding to these advances?”

• “Is inventory physically verifiable?”

Lens 2: Cash & Bank Balances vs Regulatory Deposits

🚩 Red Flag Pattern

• “Deposit under protest / Bail / DRI deposit” appears

• Cash balance falls sharply

• Borrowings increase

What this tells you

Liquidity is frozen due to regulatory intervention.

📌 This is not neutral cash — it is lost liquidity.

🔎 Action:

• Add DRI deposits back into WC gap

• Treat as blocked funds, not current assets

Lens 3: Export Turnover vs Inventory Quality

🚩 Red Flag Pattern

• Export sales look strong

• Inventory turnover improves artificially

• No matching increase in WIP or manufacturing costs

What this tells you

Exports may be paper-compliant but not inventory-backed.

🔎 Ask:

• “Is gold purity and WIP consistent with export volumes?”

• “Are job-work costs aligned with export quantity?”

This is where export-linked diversion hides.

Lens 4: Margin Stability vs Gold Price Movement

🚩 Red Flag Pattern

• Gold prices rise sharply

• Gross margins stay flat or improve

• But inventory holding period is long

What this tells you

Gold price risk is not being absorbed honestly.

Likely scenarios:

• Gold not yet bought

• Or cheaper duty-free gold substituted

🔎 Ask:

• “When was gold actually purchased?”

• “Is there a hedge or only an assumption?”

The Killer Combination (Sowcarpet Signature)

If you see 3 or more together, stop and dig:

Indicator	Seen?
High customer advances	✔️
Flat / weak inventory	✔️
DRI / regulatory deposit	✔️
Strong exports	✔️
Rising gold prices	✔️
Stable margins	✔️

👉 This is NOT coincidence. This is timing distortion.

Balance Sheet / Operational Item	What It Looks Like on Paper	What It Actually Indicates	Why It Matters	Correct Banker Treatment
Advances from Customers (Gold Schemes)	High, rising steadily	Money received before gold is owned	Future delivery obligation exists	❌ Do NOT net off WC gap unless gold is already owned / hedged
Gold Inventory	Flat or weak growth	Gold not purchased despite advances	Timing mismatch between money & gold	✅ Consider only physically verifiable inventory
Export Turnover	Strong / improving	Possible paper-compliant exports	Inventory backing may be weak	🔍 Check WIP, purity, job-work costs
Duty-Free / Export-Linked Gold Imports	Legitimate import route	Cheaper gold used as liquidity tool	Regulatory & timing arbitrage risk	⚠️ Ask: was imported gold converted into jewellery & exported?
Suspense Account	Shown under CA / Other Assets	Cash exists but cannot be freely used	Uncertain / blocked liquidity	❌ Exclude from Current Assets
ED Advance / DRI Deposit / Bail	Shown as recoverable asset	Cash locked pending investigation	Liquidity destruction	❌ Treat as blocked funds; add back to WC gap
Cash & Bank Balances	Sharp drop despite profits	Cash frozen / diverted	Stress hidden behind P&L	🔄 Reassess liquidity assumptions
Borrowings	Sudden increase	Emergency funding to meet schemes	Artificial liquidity support	⚠️ Stress-test repayment ability
Gross Margins	Stable despite gold price rise	Gold not yet bought or cheaper source used	Price risk masked	🔍 Ask timing of gold purchase
Inventory Turnover	Improves abnormally	Inventory possibly understated	Balance sheet illusion	❌ Don’t rely on ratios alone
Scheme Maturity Profile	Not disclosed clearly	Near-term delivery pressure	Liquidity cliff risk	✅ Demand scheme-wise maturity schedule
Combination of 3+ above	Looks “complex”	Classic timing distortion	Sowcarpet signature risk	🛑 Stop comfort. Rebuild WC from scratch

Item Seen	What It Usually Means	Immediate Banker Interpretation
Suspense Account	Unresolved / disputed receipt or payment	Liquidity uncertainty
DRI Deposit / Bail	Cash locked pending customs investigation	Blocked funds
ED Advance	Funds under FEMA / PMLA scrutiny	Restricted liquidity

THE LEARNING from SOWCARPET STORY :

Sowcarpet did not fail because gold disappeared overnight. It failed because time was misread.

Money arrived before gold. Gold moved without staying. Cash got locked while promises matured.

None of this was obvious on day one. It only became visible when timing finally caught up.

For bankers, the lesson is simple and uncomfortable:

When liquidity is restricted, exposure should not grow. When gold is not owned, customer money is not working capital.

Follow the timing of gold and cash —the balance sheet will stop lying.