RMA report recommends restricting hotel loans and number of hotels

The Royal Monetary Authority (RMA) , concerned with the rapid rise of loans to hotels touching around 27.935 bn in November 2018, did a comprehensive study on the issue led by the Department of Financial Regulation and Supervision (DFRS).

The RMA report recommends that RMA in consultation with the Tourism council of Bhutan (TCB) and relevant stakeholders regulate the number of hotels in the country especially in places like Thimphu and Paro, where the number has increased significantly over the years.

The report also recommends restricting loans to hotels given the oversupply of hotels and the risks to the financial sector and the economy at large.

In Thimphu alone there are about 98 standard hotels and 188 budget hotels and highest number of hotel was constructed in 2018 with 33 star hotels and 14 non star hotels.

A senior RMA official said, “We are concerned about this area as so many hotels are coming up. Looking at the present picture, we have a feeling that it can lead to something very disastrous if it is not regulated and it can hit us badly.”

He further said, “We need to worry because tourism loans are increasing drastically over the years which means people are constructing more hotels and about 200 more hotels are likely to come up in the future. So the question is in a competitive market like ours is on whether most of our hotels can sustain or not as the supply of hotels is so high and the demand is so low.”

He said that with so many hotels, hotel occupancy is falling and when occupancy drops, people are not able to repay their loan on times and when this happens, it will not just affect the industry but the whole economy.

“The money that banks lend to the hoteliers is the public’s money and if hoteliers are not able to repay the loan, banks will not get money and it’s a dead investment for the bank.

As a central bank we have to regulate because we want to protect public money and ensure that it is not misused”, he added.

“So there needs to be a limit on the number of hotels by restricting loans or through other measures”, he said.

Banks shared the same concern that the drastic increase in the number of hotel is a thing to worry but in contrast to what the RMA said they feel restricting or stopping loans is not the solution.

The Chief Executive Officer of BNB, Kipchu Tshering said, “So many new hotels are coming in particularly in Thimphu and many in the outskirts of Thimphu. As a bank we are highly concerned with so many hotels coming in. Right now banning or stopping the loan is not the solution and so we are not stopping the loans.”

He said, “Banks can’t stop people from constructing hotels but banks can keep a condition where people who wish to invest in hotel will invest 40 per cent from their pocket and banks will finance only 60 per cent. People don’t realize that investing in a hotel is not as same as investing in houses as the investment in hotel is so huge that at least a minimum of Nu 40 to 50 cores is needed to construct a star hotel.”

Regarding low occupancy, he said, “There are hotels which are doing very well, many hotels are doing well and they are paying loans on time.  When you are in the hotel business, there are so many things that we need to look into. Right location, proper design, sufficient equity to sustain losses and proper management are important and as long as you have all these things in place, there is no question of low occupancy”.

He said those hotels who are complaining that they don’t have occupancy are the hotels which are either located in wrong location or the hotels without sufficient equity or without proper management.

The BNB CEO said, “the Central bank can come up and say that the number of hotels in the county is increasing and we need to put an end to it and that we should stop providing loans for the tourism and service sector but by doing this, we are restricting the rights and privileges of those who have the money and capability to run the business. We cannot just allow certain people to run the hotel and restrict others because so many hotels are coming in. There should be other alternatives.”

Both tourist standard hotels and budget hotels are having low occupancy rates due to increase in the number of hotels and decrease in the demand for Bhutan.

The occupancy rate started dropping from 2017 and the occupancy rate in 2018 was even less with only 36 per cent from 40 percent in 2017.

Sigay from Hotel New Grand said, “When we talk about so many hotels coming in, we are not talking about budget hotels but the increase is in the number of star hotels.”

He said, “In the past, both star hotels and budgets hotels got equal number of tourists but in the recent years starting 2017, budget hotels hardly get any guest and it is not just in one or two budget hotels but in almost all the budget hotels. If we look into the occupancy, the occupancy for budget hotels would be less than star hotels”.

However, Ariya and other four star hotels that the paper talked to said that star hotels are also having low occupancy because there are so many hotels coming in and in contrast the number of tourists coming in has not increased by as much over the years.

“Ariya hotel and other four star hotels have around 40 to 50 rooms on average and they can accommodate more than 1 million tourists a year but we don’t receive enough guests especially during the lean season. We would also say that during peak season we receive sufficient guest and even our occupancy rate goes up but in general occupancy rate is always low,” said an Ariya employee.

He said, “When we talk about four star hotels, since the investment is so high, around 40 to 50 cores is invested in the construction of hotel and the amount that we need to pay the loan is also high.

Though we pay it on installments, sometimes it becomes very difficult to pay the loan if we don’t have other source of income.”

Another hotelier said, “When the occupancy rate is low and when we have to reduce our rate, we are not only compromising our price but at the same time we are also compromising our services. If we are not able to sell our room at a price we have thought of, we are able to provide services equivalent to reduced prices”.

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