With high capital costs and still higher cost of funds in terms of interest, hotel projects are struggling to survive and grow despite the growing demand for hotel rooms across the country. How does Union Bank plan to address this problem of the hoteliers?
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Debabrata Sarkar
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Room demand for premium segment hotels was sluggish in 2012-13 on account of the uncertain macroeconomic environment which impacted both business and leisure demand for the hotel industry. Also, there is an oversupply of premium segment rooms across key destinations in India. If one sees the evolving demand pattern as well as the supply pattern of hotels coming up across the length and breadth of the country, there is considerable heterogeneity in the category of hotels and their service model. Taking these factors into consideration, one has to evaluate the viability of upcoming as well as existing borrowers in the hotel industry holistically.
Further, there are some regulatory nudges to encourage credit supply to this sector. As per the RBI notification, three-star or higher category classified hotels located outside cities with population of more than 1 million are classified under Infrastructure Sector. In our Bank, the rate of interest for loans to hotel industry if classified under Infrastructure ranges from BR+1.50% to BR+3.00%. If it is not classified under infrastructure then ROI is in the range of BR+3.00% – BR+5.50% depending upon the credit rating of the borrower. The present Base Rate is 10.00% w.e.f. 08.07.2013. Further, in case of good and viable projects, we may also consider some concessions in applicable rate of interest to meet the high capital requirements of hoteliers.
What are the Bank’s strategies in terms of funding small and mid-sized (SMB) hospitality / tourism projects?
In today’s scenario, the business model of hotel industry is such that the major portion of revenue is coming from banquets and food/beverage business and as such traditional strategies based on level of occupancy and average room rates have become less significant. Accordingly, the lenders have re-oriented their loan evaluation model while approving credit to borrowers. While lending to hospitality projects, especially small and mid-sized hospitality/tourism projects, the following factors are taken cognizance of –
- Demand/supply position of the city / location
- Demand drivers for the city/ location
- Prevailing and expected occupancy rates, average room rates and revenue per available room in the city / location
- Location of the project
- Extent of Competition under hotels industry in the city / location
- Food and beverage business in the city/ location.
These factors/parameters are not exclusive but taken as complementary so that all available information is evaluated while processing any loan application. Current difficulties notwithstanding, which are in line with slowing income in economy, we see a lot of demand in hotels and hospitality industry. The small enterprise of today will grow to be medium and large enterprise of tomorrow. We are very much vigilant to this macro-industry dynamic and have positioned ourselves accordingly. Though there is increased consciousness on quality aspects, our thrust is to tap the latent as also expressive demand of this sector.
Tell us about the major loan products of the Bank, which offers easier credit to this sector?
There is whole bouquet of schemes being offered catering to the demand of the hospitality industry. Mostly it is a project specific financing to the industry. However, we have designed a product namely “Union High Pride” to cater to the need of mid corporate segment of the hotel industry who generally require credit facility in the range of Rs 5 crore to Rs 25 crore. “Union High Pride” borrowers also benefit from several amenities including multicity cheque books subject to fulfillment of criteria. There is a time frame for sanction/renewal of “Union High Pride” proposals- within 15 or 7 days respectively from the date of submission of proposal by the party for fresh and existing accounts. The borrowers having multi-city trade dealing can utilise our CMS product on attractive terms.
Banks and financial institutions are often not willing to fund start-up standalone ventures. Is this also the case with Union Bank? If no, then how is the Bank helping in funding start-up standalone projects?
Union Bank of India takes pride in sharing the dreams of its customers. We believe in enterprise and honor the entrepreneurs with a dream. We believe in growing along with the customers. Be it start-up standalone ventures or the seasoned players, we decide the proposal purely on merit and a on case-to-case basis.
Like any other industry, the business specifics do need to be attended while evaluating any proposal. In case of the hospitality industry, apart from the location where the hotel operates, the success of a hotel depends on tie-up arrangement for operations with the well known brands in the industry. Affiliation to key international and domestic brands ensures that the hotel can improve occupancies on the back of loyalty programs and distribution networks of the brand. We are also aware that the presence of a seasoned hotel operator (through a management contract) increases the prospects of hotel operations being carried out optimally.
The hospitality sector has been long demanding infrastructure status from the government to borrow funds at low interest rates to create capacity but the government is yet to accept their demand. As a seasoned banker, how do you think that such a move will help the hospitality industry to attract cheaper credit from banks?
The hospitality industry is a very important sector if one sees its contribution to national income. Through its many backward and forward linkages, the sector is inalienably interlinked with economic life of a nation. Moreover, the sector is facilitator as also beneficiary. At present, three-star or higher category classified hotels located outside cities with population of more than 1 million are classified under Infrastructure sector. The difference between the lending rates to Infrastructure Sector and other general sectors is normally 1.50% – 2.50%. Thus, there are visible benefits if the sector earns an infrastructure status. We may further consider concessions in rate of interests in case of viable greenfield/brownfield hotel projects on a case to case and merit basis.
