SC ORDER A RELIEF FOR STRESSED COMPANIES

Cash flow of airlines, hotels, small-scale industries yet to see recovery

The court order has come as a relief to stressed companies with a crimped cash flow. The cash flow of several companies from the aviation, hospitality, and steel sectors are still 50-60 per cent below pre-covid levels, leading to fears they might start defaulting. The Reserve Bank of India has set up a committee to recommend debt restructuring.

The Supreme Court’s (SC’S) interim order on Thursday came as a relief to stressed companies with crimped cash flow. The cash flow of several companies from the aviation, hospitality, and steel sectors are still 50-60 per cent below pre-covid levels, leading to fears they might start defaulting. The Reserve Bank of India has set up a committee to recommend debt restructuring. The central bank will soon come out with a report.

The court’s order came after several industry associations challenged the interest levied on interest on loans that were under moratorium due to the Covid-19 pandemic. The industry has also asked the government to consider a temporary reduction in the goods and services tax rates, especially in the consumer durables segment.

“Almost all governments the world over are offering billions of dollars in cash incentives to airlines and hotels, so that they remain in business. In India, no financial package has been announced by the government so far,” said a chief executive officer (CEO) of a private airline, adding, “Without a package, several airlines may be grounded.”

A chief financial officer (CFO) of a private airline said that restructuring of genuine cases of non-performing loans is the need of the hour. This will allow the system to declog. He said a two-month extension doesn’t mean much for airlines since demand will be sluggish for more than a year.

“Airlines are under huge pressure for no fault of theirs. Banks should recognise genuine cases, where giving a longer moratorium will help the company to survive. Companies are talking to their lenders bilaterally and working out a longer repayment period,” he said.

Rating agency CRISIL recently downgraded low-cost carrier Spicejet’s short term-loans, following significant deterioration of its business risk profile.

The CFO quoted earlier added that lenders are reluctant to increase exposure to airlines due to historical issues like bankruptcy of Kingfisher Airlines and Jet Airways, but that should change. “There are airlines in India with strong management which would have expanded their business hadn’t this pandemic struck. Banks should do due diligence but not be hesitant to lend to such companies,” he added.

“It’s a huge relief. Had it not been for the SC judgment, quite a number of hotels would have become an NPA account,” said the CEO of a hotel chain. The branded hotel segment has close to 160,000 rooms. Of this, 100,000 are owned by individuals who do not have access to capital and are highly leveraged. At least a third would have become NPAS. In value terms, this would translate into ~13,000-25,000 crore, said a hotel industry executive.

Ajay Bakaya, managing director at Sarovar Hotels, said: “We welcome the SC directive. Plenty of hotels are struggling and this will give them some breathing space.” The average occupancy across hotels in India is somewhere close to 20 per cent. This doesn’t even cover the operating expense.

Apart from large companies, the pandemic has also hit small and medium enterprises unable to pay salaries to their employees and vendors. “My bank debited the interest for the months of March and April, but when I mentioned the moratorium, it was reversed a day later,” said the CEO of a small-sized enterprise in Mumbai.

The festive season has already begun and some positive signals by the government might give a nudge to consumption activity. Specific announcements for hospitality, tourism, retail, and the health care sectors are eagerly awaited as well.

Greater impetus to housing, infrastructure, and the auto sectors, and support to state governments for purchase of buses for city transportation must also be considered, industry lobby firm, Federation of Indian Chambers of Commerce & Industry said soon after contraction in gross domestic product numbers were announced.