RBI opens ECB floodgates for hotels
The recent move is expected to benefit the hotel industry as it will allow the players to raise money overseas and repay loans taken from domestic banks as well as for capital expenditure. speaks to industry stakeholders and finance experts to get insight
MEGHA PAUL Providing
much-needed relief to the hospitality sector, the Reserve Bank of India (RBI) has allowed companies owning hotels to prepay loans out of external commercial borrowing (ECB) proceeds. It has been decided to include Indian companies repayment of the outstanding rupee loans.
The recent move is expected to benefit the hotel industry as it will allow the players to raise money overseas and repay loans taken from domestic banks, as well as for capital expenditure. All other aspects of the
ECB is a highly regulated method of financing. The end-use restrictions do not permit secondary acquisitions and funding of working capital
scheme shall remain unchanged and the amended ECB policy will come into force with immediate effect. The Reserve Bank had earlier relaxed the ECB norms to help companies raise more funds from overseas markets, to boost infrastructure sector funding in the country. Besides, RBI had also relaxed the ECB norms for repayment of rupee loans within the overall ceiling of $20 billion.
According to Kamlesh Barot, EC Member and Immediate Past President, FHRAI, the previous budget, which created the anomaly that only three-star or higher category hotels located outside cities with a population of more than one million are included in the RBI’s Infrastructure lending List and the Government of India’s Master List of Infrastructure Sub-sectors, is addressed partially now. “We, at FHRAI, are particularly grateful to the Department of Economic Affairs and the Reserve Bank for favourably considering FHRAI’s vigorous representations since the past year and more, in this regard,” he says. “Unfortunately, the relaxation doesn’t come fully, in as much as they have fixed the maximum limit of ECBs at 75 per cent of the average or 50 per cent of the highest foreign exchange earnings realised for the last three years foreign exchange earnings, whichever is higher, thus restricting the benefit that accrues to the industry under this policy. For the rupee loan conversions, this would enable barely 15-20 per cent of the outstanding high cost domestic debt of various hotel companies to be refinanced by way of ECBs. To give a whole-hearted incentive to our sector, this cap should be raised to seven times the quantum of the average of the last three years earnings in foreign exchange, of the respective company. We will continue to lobby with the Department of Economic Affairs and the RBI for this,” he adds.
11 hotels in India have availed ECBs in 2012 to an equivalent amount in USD of 20,23,90,651. Most of these borrowings would be under the RBI’s policy of allowing hotels to raise ECBs of up to $200 million under the automatic approval route, specifically to finance fresh capital expenditure, he reveals. As Barot rightly points out, the recent move is only the first step towards existing loan and fresh loan borrowings, which does not actually translate into any tangible benefits for the hotel sector. The reasons are obvious from the above arguments and the following facts.
“As per our research, the outstanding credit of scheduled commercial banks in India to the ‘ Tourism, Hotel & Restaurant’ sector is 392448.9 million. The foreign exchange earnings of the top 20 listed hotel chains for 2012 and 2011 were 2709.63 crore and
2664.54 crore, respectively. The interest rate range that our companies are currently being forced to borrow from domestic banks is at rates as high as 13-16 per cent whereas ECBs are available at attractive spreads of LIBOR+ 4- 6 per cent,” he claims.
Talking about the new development, KB Kachru, Executive Vice President – South Asia, Carlson Hotels, Asia Pacific reiterates, “ECB is a highly regulated method of financing. The end-use restrictions do not permit secondary acquisitions and funding of working capital. Considering the oversupply situation in key markets, the number of greenfield projects in near future seems to be
The cost of borrowing under the ECB route has three components - the LIBOR rate, the Spread, and the Exchange Rate
limited, and thus may restrict the benefits of ECB.”
It will certainly affect the industry positively considering the option to refinance existing loans and thus provide relief to degraded profits, but the benefits may be confined to five-star and luxury hotels, he confirms. The threshold of 250 crore may limit the impact on development considering the shift in focus on mid-scale and budget hotels in secondary and tertiary cities for emerging middle class. There are several other challenges that continue to affect development such as FSI limitation, licensing process and multiple taxation issue, he laments.
Feels Saionton Basu, Partner & Co- Head India Group, Global Chair Multilaw India Practice Group, Penningtons Solicitors, “The cost of borrowing under the ECB route has broadly three variable components -- the LIBOR rate, which is common to all lenders and borrowers; the Spread, which could be indi-
vidual to each lender and each borrower; and the Exchange Rate. Any variation in any of these components will impact the overall cost of borrowing and since the entire raison de etre of raising debt through the ECB route is to gain from the lower cost of borrowing, corporates must carefully consider hedging arrangements and whether they are appropriate to mitigate against fluctuation in the variable elements.” These are the challenges which are universal to all corporates raising ECBs and, particularly, in the hotel sector, where positive cash flows are protracted and servicing levels have to be carefully monitored.
On whether this move will augment increase in development, Basu opines, “There is usually a gap of at least two- four per cent between a domestic term loan and a comprehensibly hedged ECB, through a combination of principal, interest rate and cross currency swap contracts. This move will likely free up the cash flow situation on account of lower debt servicing levels and thus augment capacity in the industry. Accordingly, this move will most certainly be welcomed by the hotel industry in India.”
Throwing light on the way forward, Param Kannampilly, Chairman & Managing Director, Concept Hospitality Group points out, “This is a positive move in the right direction by the RBI. It will benefit many projects, especially the larger ones. We would like the RBI to continue in the same direction and extend this ECB facility to hospitality projects below 250 crore in a bracket that encompass the majority of our industry.”