Reviving tourism businesses

Coronavirus has caused unprecedented destruction to every sector of economy. With no end to the pandemic in sight, the mood of the world continues to be gloomy. We are locked in such a situation where the focus on the survival of human-beings is inevitable, but at the same time it’s extremely important to contemplate ways to revive economic activities.

One of the biggest victims of the Covid-19 pandemic-induced lockdown has been the travel and tourism industry. Statistical data available reveals that the industry contributes 10.3% of global GDP. The industry provides 330 million jobs – 10% of all jobs in 2019. The sector experienced 3.5% growth last year, outpacing the global economic growth (2.5%) for nine consecutive years.

Now the challenge posed by the lockdown driven by the pandemic is unprecedented and the tourism industry is facing collapse as mobility and enabling mechanism of consumption got a severe hit. Mobility of people seems a distant dream at the moment. Experts peg resumption of mobility to reasonable level not before October 2020. As the tourism industry is completely shut down from mid-March, prolonged shutdown could affect the employment and income prospects of the sector to a great extent, given that MSMEs constitute roughly 85% of all tourism establishments.

According to the estimates of the World Travel and Tourism Council, the coronavirus outbreak will result in the loss of 50 million jobs in the travel and tourism industry. Asia will account for 30 million of the lost jobs. Once the outbreak is contained, it will take another 10 months for the tourism industry to recover fully, according to a news report published by the World Economic Forum. Even though it would be difficult to assess of the extent of employment losses in India, it should be huge given the MSME character of the sector.

Further, tourism industry feeds huge masses of the poor and weaker sections, less literate and low-skilled. Over 95% of the Indian hospitality industry is dominated by bed & breakfast facilities, guest houses and other small-scale units. It would be safe to assume that at least three-fourths of tourism sector are in the informal sector. The impact of a crisis of this magnitude could crush the industry.

Given the way tourism supply chains have broken, and continue to break down, in India across all its key inbound, domestic and outbound markets, FAITH (Federation of Associations in Indian Tourism and Hospitality) puts tourism sector to take a Rs.10 lakh crore hit, denting 10% of the country’s gross domestic product (GDP). This value covers the whole tourism value chain spanning airlines, travel agents, hotels, tour operators, tourism destinations, restaurants, transporters and guides, among others.

In the context of J&K, tourism industry is extremely crucial given its share in economic cycle of the region and employment generation. Even as pre-covid scenario was not favourable to the tourism industry owing to the three-decade cycle of turmoil, the pandemic-induced further complicated the sector, leaving over 6 lakh people financially struggling who directly or indirectly depend on the tourism industry for their livelihood. Among others in the sector, hotels and guest houses have been hit badly and are badly in need of financial support during the pandemic crisis to stay afloat.

J&K Bank while taking note of the adversities faced by the hotels and guest houses due to the coronavirus driven lockdown and its long-term impact on the businesses, recently rolled out a tailor-made scheme – Business Support Loan Scheme 2019-20 for Hotels and Guest Houses. Those associated with the sector can avail financial assistance for meeting their expenditure towards salaries to staff & other fixed costs. The scheme shall remain in force (sanctioned & disbursed) up to October 31, 2020.

Who can access this Business Support Loan Scheme?

The scheme is exclusively for borrowers of the bank and covers all registered/recognized hotels and guest houses. Their accounts should be standard as on 29.02.2020 and continue to be standard on date of disbursement of facility under the scheme. Sound financial position and a satisfactory repayment record in respect of credit facilities already availed is prerequisite for the applicant to access this special scheme.

However, in case of accounts wherein the installment or interest is overdue for 2 month (SMA 2) as on 29/02/2020 are also eligible under the scheme subject to the certain conditions:

The Units should be functional & economically viable for their meaningful revival. The unit must have sufficient cash generation capacity to service the debt obligations comfortably. 

The securities charged to the Bank should ensure 100% security cover for the total exposure (existing & proposed exposure under the scheme).

The internal rating grade should be 6. Above this level are not be eligible. However, borrowers with below Rs 15.00 lakhs exposure are exempted from internal rating criterion.

What is the maximum amount of finance granted under the scheme?

The quantum of finance is linked to the mismatch in cash flows for a maximum period of 09 months or 09 months total expenditure towards fixed cost, whichever is lower. However there is a cap in the maximum quantum of finance as per the size of the Unit. For example, for 12 rooms unit, maximum permissible quantum of loan is Rs.45 lakh; unit with 13-18 room, maximum finance granted under the scheme would be Rs.72 lakh; unit with 19 to 40 rooms is eligible for maximum finance of Rs./108 lakh Notably, a unit with more than 100 rooms would be granted maximum loan of Rs.200 lakh under the scheme. Precisely, the maximum amount of loan is linked to the number of rooms in a unit.

What are the components which come under fixed cost?

Fixed Cost includes establishment cost (staff salary, payments for staff accommodation), utilities bills (electricity bills, water bill, telephone and Internet bills), taxes, if any, annual maintenance cost (AMC) for all equipment’s/machines (HVAC, laundry, Sewage Treatment Plants etc.) & hotel management software and housekeeping and maintenance.

Is it a term loan?

Yes. The loan is to be repaid in 24 equated monthly installments after initial moratorium period of 12 months (in respect of principal amount only) from the date of first disbursement of the loan.  However, the borrower has to pay interest applied in the account during the moratorium period.

What is the nature of security against which the facility would be granted?

There is simply extension of charge over the existing securities.  However, in case of SMA-2 accounts, where realizable value of the existing securities is less than 100%, additional security be obtained to ensure that the realizable value of securities charged to the Bank is at least 100% of the total exposure (existing exposure & proposed exposure under the scheme). Besides, personal guarantee of the owner/promoter of the hotel or guest house is needed.