Hotel industry in ‘inhospitable’ Indian ecosystem

According to The World Travel and Tourism Council (WTTC), tourism generated 6.8% of India’s GDP in 2019 and supported 8% of its total employment. But do we really care about this industry?

Hotels are the backbone of tourism industry. And they are facing probably the worst ever time in their history due to the ongoing Covid pandemic. These are existential crisis for most of the players. Any token relief from the government in terms of additional ECLGS loans and restructuring option looks far from enough to save them.

But I would like to assert that hotel industry in India was in deep trouble even before this pandemic started. In most cases, it was never a viable investment proposition to begin with.

Reason is simple: we all know that hotel industry is a highly capital-intensive business. The majority of the investment is in long-term real estate assets ie the hotel property. But the funding available from banks/financial institution is ‘relatively’ short term. There is a funding mismatch and that is like violating the fundamental rule of finance.

Indian banking and finance eco system behaves funny at times. You can get a housing loan for 30 years and an office loan for 20 years but a hotel wont get a loan for more than 7 years in most cases. Though the underlying asset being funded is real estate in all these cases.

A real estate asset has a long life, typically 30-50 years. As an asset is depreciated over its useful life, similarly the financing available for these assets should also commensurate to the life of the asset. Hence, ideally a hotel project should be financed with loan tenor of more than 15 years with ballooning repayment.

Ask any hotel developer, he would emphatically argue that a hotel normally starts generating positive cash flows only after 4 to 5 years of operation. But still the cash flows are rarely sufficient to honour the bank liabilities in these early years.

So, I would like to make a humble suggestion to the banking industry to save hotel industry from their otherwise inevitable dismal fate:

Convert the existing project funding loans on operational hotels into “Loan Against Property” with a fresh tenor of 15 years or more.

This will not just save hotels from defaulting on their liabilities but will also prevent the industry from getting an overall negative outlook.

A simple logical and rational solution!!! Isn’t it?

We cannot keep punishing the businesses for fallacies of the financing eco-system in the country. Its high time we wake up. Lets show some empathy. This is the least we can do.