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Union Budget 2013: Hospitality sector seeks easier funding

Manu Kaushik     February 15, 2013
The hospitality industry is hopeful that Finance Minister P. Chidambaram will inject new life into the sector when he presents the Union Budget on February 28.

Currently, India is estimated to have 85,000 branded hotel rooms across various categories. While that number may seem huge, the fact is, there is a shortage of some 150,000 rooms.  

Industry experts blame the shortage on the high cost of capital to build a hotel. At present, it takes about Rs 1.2 crore to construct a luxury hotel room. For an upscale hotel room, the cost is around Rs 80 lakh. And then there is the land cost, which varies from 20 to 60 per cent of the total project cost, depending on the location (higher in the case of metros). Developers have to borrow this money at high interest rates.

A comparison between borrowing rates for hotel developers in various countries shows that Indian developers have to shell out the most in terms of debt servicing (see table).  

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"Providing the hospitality industry with lower interest rates, as offered to infrastructure projects, will make hotel development more feasible. It will encourage investors to build more hotels, which will lead to more investment in the economy, more construction jobs, and more permanent jobs when the hotels open," says Kaushik Vardharajan, Managing Director (South Asia) of hospitality consultancy HVS Global Hospitality Services. "Having more hotels across Tier 1, 2 and 3 markets will also result in more travel and more economic activity in these markets."

The sector also wants loans to have a longer tenure. With the exception of a few private sector banks, the maximum tenure of most loans given to the hospitality sector is 10 years. One of the representations the sector has made to the finance ministry is for an increase in the tenure to 15-20 years. This will help owners meet debt service requirements, especially in the initial years when a hotel's performance would not have stabilised.  

For banks, providing longer tenures to developers will reduce defaults: NPAs (non performing assets) and CDR (corporate debt restructuring) in the hospitality sector. In the recent past, several companies, including Hotel Leelaventure, Mumbai-based Kamat Hotels India, Royal Orchid Hotels and Neesa Leisure, have gone in for corporate debt restructuring due to their inability to meet debt obligations.

The sector, like many others, wants industry status . However, the finance ministry has indicated that granting this will be difficult.

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