Indian Hotel Sector May Be On The Brink Of Collapse

The COVID -19 pandemic has deeply impacted 90% of the tourism and hospitality sector. The sector employs nearly 4.5 crore people; supports around 16 crore people, and contributes 9% to India’s GDP. Travel trends today has reported that airlines and hotels as the worst impacted sector in India, according to McKinsey’s study. The hotel sector also appears in the list of strained sectors on Debt Service Coverage Ratio. The Revenue loss to the hotel’s industry is expected to be Rs. 90,000 crores in the year 2020.

RBI has allowed relief on Loan moratorium on interest and principal repayment for 3 months (later extended to 6 months). This will only help the industry to survive in the short term which may not be enough. On behalf of the Indian hospitality sector, the Hotel Association of India (HAI) has been recommending more relief measures for the sector to the mutual advantage of the Industry, the RBI, and the national economy.

4 key factors are working together against the hotel sector today

  • Hotel demand has declined as it is highly discretionary. This has worsened due to the absence of air travel, corporate restrictions, cancellation of holidays, state lock-downs and the imposition of quarantine on travelers.
  • 70% of the hotel’s costs are fixed in nature, mostly towards payroll expenses and Government levies.
  • Hotels are capital intensive with a long gestation whereas debt offered is typically short term and high cost rendering the sector highly sensitive to demand destruction.
  • Lenders find the negative outlook on the industry unappealing, leading to a liquidity crunch and increased rates of interest to cover for the perceived risk. 


As the hotel industry has been requesting the RBI to extend more proactive support

The current debt levels in the organized part of the industry (which is less than 10% of the total) have reached ₹45,000 Crore. A longer-term solution for the next 24-36 months is needed, which helps both the stakeholders: the borrower (unable to pay the interest and principal for the foreseeable future) and the lender (loans becoming NPAs).

Thus, HAI is recommending relief – for those companies with good credit history i.e. Standard Assets as on 31st March 2020. An apex body focused on the hospitality sector, is proposing an extended tenure and a staggered approach to the applicable rate of interest in the awaited new normal. 

Three stages to return to normalcy is anticipated

  • Survival Phase (next 9 months): The moratorium on interest and repayment of principal is extended for the entire FY21 i.e. till 31st March 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).

Also Read: Survey Reveals Most Frequent Flyers Intend To Travel Within 3-6 Months


Please enter your comment!
Please enter your name here


More Articles Like This

More from the Author