Hotel sector to witness 50% loan defaults post RBI's August 31 deadline

Hotel sector to witness 50% loan defaults post RBI's August 31 deadline

Outstanding loans worth Rs 50,000 crore are attached to hotel real estate. A 50 per cent delinquency would result in Rs 25,000 crore of loans turning bad


  • Close to Rs 25,000 crore of hospitality loans are at the risk of default after August
  • Low revenues, high fixed costs translated into inability of hotel owners to meet debt obligations
  • Relief in form of suspension of insolvency provisions for six months is ending on September 25
On August 31, when Reserve Bank of India's (RBI) six months of moratorium period ends, the financial institutions could suffer a major shock. Loan defaults in the hospitality sector after the end of August could go up as high as 50 per cent of the total outstanding loans extended to the sector, say industry experts.

As per consultancy firm Hotelivate, approximately Rs 50,000 crore worth of outstanding loans are attached to hotel real estate. A 50 per cent delinquency would result in Rs 25,000 crore of loans turning bad. Though the exposure of banks towards hospitality is still relatively low as compared to transportation, trade and non-banking financial services (NBFCs), the amount of defaults in hotels could be significantly higher than other sectors with large exposure.

That's largely due to the shutdown of business for 75 days. Even now, only 40 per cent of the branded hotels have opened up since the government allowed them to operate from June 8. Those who are running have witnessed tepid business with occupancies of 15-20 per cent. The outlook for the sector remains weak as the fear of getting infected continues to weigh heavily on the mindset of travellers. On top of that, nearly 50 per cent of hotel costs are fixed which makes it extremely challenging for hoteliers to run operations and meet their debt obligations at the same time.

Unlike infrastructure and power sectors, hospitality was never known for high rate of delinquencies. Because of the high cost of land and construction, most of hotel developments in India are funded through debt. Yet, the cases of defaults were relatively lower. Besides some prominent cases like Hotel Trident in Hyderabad and Viceroy Hotels in Bengaluru, the sector has largely managed to stay away from getting a bad name in the banking circles.

But that's set to change. "It's likely that most of the sector's distress is recent. This means that these loans will turn non-performing assets (NPA) in the December 2020 quarter. There will be a lot of restructuring and consolidation then," says Ashwin Bishnoi, partner (corporate restructuring and insolvency practice) at Khaitan & Co. He says that a high percentage of loans in the sector are under the moratorium scheme of the RBI.

As per RBI rules, the loan defaults are classified into three categories: 0-30 days (Special Mention Account-0), 31-60 days (SMA-1) and 61-90 days (SMA-2). The banks are allowed to start resolution or bankruptcy proceedings against defaulters within 30 days of default. Last year, the Supreme Court gave a relief to defaulters when it asked RBI to stop the resolution process just one day after the default.

Hotel owners are running against time as government's relief in the form of suspending Insolvency and Bankruptcy Code (IBC) provisions for six months is ending on September 25. That means lenders can initiate insolvency proceedings against defaulting hoteliers from September 25 onwards unless the government decides to extend the deadline further till March 25, 2021.

"The problem is that even if hotelier defaults for 30 days with a particular bank, no other bank would lend him money. That's worrying because in the current circumstances, hotels need working capital loans for short-term expenses which they would not be able to meet from usual business operations. The salaries and vendor payments would then be stuck, and this is going to have a cascading effect on the economy," says Siddharth Thaker, managing partner at Prognosis Global Consulting.

A large hotelier, on condition of anonymity, says that the sector has thus far been neglected by the government despite repeated requests from his industry peers. "The debt servicing holiday has been extended to everybody. We have been asking for a hospitality-focussed debt relief fund to ease out the pressure since it's going to be a long journey to recovery," he says.

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