Indian hospitality industry on the brink of collapse, says Hotel Association of India (HAI)

The Indian hospitality industry is on the brink of collapse and is in dire need of support from the government and the Reserved Bank of India (RBI) to be able to get back on a revival path. According to the Hotel Association of India (HAI), four key factors are responsible for the deteriorating health of the hotel sector and the situation is only getting more challenging with every passing day.

The apex industry body pointed that being a discretionary spend, there is negligible demand for hotel rooms and services. Absence of air travel, corporate restrictions, cancellation of holidays, state lock-downs and imposition of quarantine on travellers have only added to the turmoil. Furthermore, hotels are bearing the brunt of fixed costs to the tune of almost 70%, which largely comprises payroll expenses and government levies.

Being capital intensive with a long gestation period banking on high cost, short-term debt funding has become a major peril as well. Topping it all is the negative outlook on the industry making it unattractive for lenders thereby leading to a liquidity crunch and increased rates of interest to cover for the perceived risk.

In such a scenario, the Indian hotel sector will collapse if not supported by the Government and RBI, said HAI in a statement earlier today.

The COVID -19 pandemic, HAI said, has led to demand destruction in excess of 90% for the tourism and hospitality sector which employs nearly 4.5 crore people; provides livelihood to around 16 crore people and contributes 9% to India’s gross domestic product (GDP).

Citing a recent McKinsey study, the apex body said that airlines and hotels were the worst impacted sectors in India with around 75% output decline in the first quarter of fiscal 2020-21 over fourth quarter of fiscal 2019-20. Also, the hotel sector features in the list of strained sectors on debt service coverage ratio (DSCR). The overall loss of revenues for the Indian hotels sector in the year 2020 is pegged at Rs 90,000 crore.

While the RBI has announced an immediate term to avert the crisis by allowing relief on Loan moratorium on interest and principal repayment for three months (later extended to six months but that will only help the industry to survive in the short term which may not suffice for revival and subsequent thrival of Indian hospitality that has attained great heights globally for its service standards.

Continuing with its efforts to highlight the hotel industry's plight, the apex industry body, has been recommending more relief measures for the survival, revival and thrival of the sector in the hope of a much needed support from the government at this juncture.

"The hotel industry is now solely focused on survival and has been requesting the RBI to extend more proactive support. The current debt levels in the organised part of the industry (which is less than 10% of the total) stands at Rs 45,000 crore. Unfortunately, an immediate term solution will only defer the crisis as what is needed is a longer-term solution spanning the next 24-36 months which solves for both stakeholders: the borrower (unable to pay the interest and principal for the foreseeable future) and the lender (loans becoming NPAs)," HAI said in a statement.

In this regard, HAI is recommending relief - for those companies with good credit history i.e. Standard Assets as on March 31, 2020. To this effect, the apex body has proposed an extended tenure and a staggered approach to the applicable rate of interest in what it anticipates will be the three stages for a return to normalcy.

-- Survival Phase (next nine months): The moratorium on interest and repayment of principal is extended for the entire FY21 i.e. till March 31, 2021, the interest due is added back to the total principal outstanding and the loan term extended by 12 months. This will solve the current cash crunch as there is expected to be almost no demand for FY21.

-- Revival Phase (following 18-24 months): Interest Rate @ Repo Rate + 200 bps: the lending institution can fund this by borrowing from RBI without being out of pocket.

-- Thrival Phase: At MCLR as the market improves and performance of the industry reaches 50-70% of Pre-COVID levels (expected 30+ months).

(The writer is a Mumbai-based independent business journalist and has extensively covered diversified consumer businesses over the last two decades. He can be reached at hello@ashishktiwari.com)