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Monday, 20 June, 2016, 10 : 00 AM [IST]

‘Unless the business climate improves, India won’t see many hotel transactions’ - Anoop Bali, Chief General Manager, TFCI

Tourism Finance Corporation of India (TFCI) is a NBFC, dedicated for tourism infrastructure funding in the country with a track record of more than 25 years. The Corporation has been playing the dual role of a preferred consultant for tourism infrastructure development as well as financing projects since its inception. To understand the reasons for the current financial stress in the hotel sector, P Krishna Kumar met with Anoop Bali, Chief GM, TFCI. Excerpts.
Anoop BaliQ. Do you see the prospects of another investment cycle in the hotel sector in India soon? What is the demand for finances from the sector currently?
We have to understand the demand-supply situation in the sector first. Currently, there are 120,000 hotel rooms in the country in the classified sector. There are 60,000 odd rooms under development, of which active supply is only 50%, rest are on hold at the moment. That means 25,000 – 30,000 odd rooms will be added over the next 2 to 3 years. Today, hotels are operating at 60% occupancy, meaning demand for 72,000 rooms. Unless occupancies strengthen to 65 to 70% consistently over the next couple of years, confidence to invest in new hotels will not come. Therefore, 2017 will be the make or break year for hospitality investment. As of now, what is happening is financial re-engineering for those opened in the last 3-4 years and are under financial stress.

Q. How do you understand the financial stress in the hotel sector and how serious is it?
Banks have lent roughly INR 35,000 crore to the hotel sector over the last 5-6 years as outstanding loans, out of which approximately INR 8,000 crore are stressed. That comes to 30%. The stress factor is high in the hi-end luxury segment. The primary reason for this is the rate correction that happened in the market. The difference in the expected ARR at the time of asset conceptualisation  and the actual ARR that the asset was able to generate when the project became operational has put owners of many assets in a spot. The EBITA margins became low due to service loans.  

Q. Why are not many asset restructuring companies looking at hotel investments even when many of the hotel assets are stressed?
The bank has an option to sell the loan portfolio to an Asset Restructuring Company (ARC) at a certain value. This can be at a book value, or at a discounted value or at a premium. The ARCs have to pay 15% upfront to the banker and balance 85% as security receipts, redeemable over a period of five years and further extendable. For this to happen, ARCs have to find the asset viable.

Generally, owners’ and promoters’ valuations are based on the asset value, but a buyer or an ARC looks at the earning potential. There is a gap that exists here.  Unless the economy picks up well and business climate improves, I don’t see the prospects of many hotel transactions happening in India. Even funds which have come are keeping a low key as of now.

From a lender’s stand point, they always have a cushion when it comes to Non-Performing Assets in the hospitality sector. Unlike other sectors, hotel investment is part of a real estate and its value seldom depreciates. So, in any case, the promoter will be the loser.
Q. How far is TFCI impacted by NPA?
As far as TFCI is concerned, our gross NPA is 2.5% and we have a marginal net NPA. We have the lowest NPA in the industry. This is largely because of our clarity in focus. While most of the lenders were lending to hi-end hotels, TFCI slightly shifted its focus to mid-market lending. We were able to do that because of the expertise that we gained over the last 25 years.  

Q. What is your advice to owners who are currently under financial stress?
The  market has started showing improv-ements, and further improvements are expected in 2017. However, actual return will start coming from 2018 onwards. The hotel business is closely connected with many other industries and sectors. Therefore, big infrastructure projects announced by the government, including the Smart City development, will open up business opportunities for the hotel sector in the next couple of years. It is better to hold on till then.

Q. What is the capital available for lending with TFCI?
We don’t have any capital constraints to fund projects. But our average ticket size is INR 50 to 60 crore per project. But there is no minimum size. If any hotel requires small funds for renovation, we can provide that. On the other hand, if somebody wants higher capital funding, we can help them get it through banking consortiums.
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