Tourism Finance Corporation of India Ltd Management Discussions.

1. Business and Economic Environment

India is one of the fastest growing major economies in the world. After registering GDP growth of over 7 per cent for the third year in succession in 2016-17, the Indian economy witnessed disruption in 2017-18 as the Govt pursued its reform agenda aggressively and recorded GDP growth of 6.7 per cent. Even with this lower growth, GDP growth has averaged 7.3 per cent for the period from 2014-15 to 2017-18, which is the highest among the major economies of the world. The growth achieved, in a milieu of lower inflation, improved current account balance and notable reduction in the fiscal deficit to GDP ratio, makes it all the more creditable.

The central government, has introduced several programmes over the past year, including ones to augment the ease of doing business, encourage digitalization, reduce skill insufficiencies, foster entrepreneurship and boost urban development. These deregulation measures, both current as well as foreseeable, have boosted Foreign Direct Investments (FDI), which registered a growth of 8 per cent in 2016-17 over the preceding year. Furthermore, other institutional reforms which are in various stages of execution, such as the Goods and Services Tax (GST), the commencement of NCLT under the Insolvency and Bankruptcy Code (IBC) and the Arbitration and Conciliation Act, are likely to be the significant contributors to the countrys economic growth going forward. The acceleration of investment friendly policies, structural reforms and low commodity prices has provided a strong impetus for growth. India has improved its ranking in the World Banks Doing Business Report by 30 spots over its 2017 ranking and is ranked 100 among 190 countries in 2018 edition of the report. Moodys also upgraded Indias sovereign rating after 14 years to Baa2 with a stable economic outlook.

2. Industry Structure and Development

Tourism in India has witnessed steady growth over the past few years, aided by the rising purchasing power of the expanding middle class and the shift from foreign to domestic tourism. The Travel & Tourism industry has been a major contributor to the economic growth of India, and is fundamental in creating employment and generating income for both skilled and unskilled labour. The industry contributed 9.4% of the total employment (both direct and indirect) in 2017. The industry is expected to generate 13.45 million jobs across sub-segments such as Restaurants (10.49 million jobs), Hotels (2.3 million jobs) and Travel Agents/Tour Operators (0.66 million jobs). The Ministry of Tourism proposes to help the industry to meet the increasing demand of skilled and trained manpower by providing hospitality education to students as well as certifying and upgrading skills of existing service providers.

Indias Travel & Tourism sector was also the fastest growing among the G20 countries, growing by 8.5% in 2017. Govt. has also made serious efforts to boost investments in the tourism sector by allowing 100% FDI through the automatic route. Further, grant of visa

on arrival to nationals of more than 150 nations have contributed significantly in terms of growth of foreign tourist arrivals in the country. The country for the first time witnessed 10 million foreign tourist arrivals in 2017.

The tourism and hospitality sector is among the top 10 sectors in India to attract the highest Foreign Direct Investment (FDI). During the period April 2000-March 2017, the hotel and tourism sector attracted around US$ 10.14 billion of FDI according to the data released by Department of Industrial Policy and Promotion (DIPP). As per industry experts, midhotel segment in India is expected to receive investments of Rs 6,600 crore (US$ 990 million) excluding land cost over next five years, with major hotel chains like Marriott, Carlson Rezidor and ITC planning to set up upscale, budget hotels in state capitals and tier-II cities.

While an assortment of influences had repressed the Indian hospitality sectors endeavours to grow from 2009 to 2016, the sector has finally woken up after a longish nap. During 2017, the nationwide occupancy was the highest since 2008, countrywide average room rates (ARRs) clocked a clear and measurable increase over several preceding years and the overall supply-demand scale is now tilted squarely in favour of growth in demand outpacing new supply. The rising purchasing power of the Indian middle class has aided the exponential growth of domestic tourism, and helped in narrowing the gap between lean and peak seasons. Further, todays discerning travellers do not shy away from spending on upscale or luxury hotels in such destinations. The hospitality industry is now in its second year of the much-awaited up-cycle and, it is time for industry stakeholders and investors to grab the opportunity and boost performance. The markets are looking strong; the proposed supply is minimal and, demand is more than likely to continue growing.

3. Opportunities and threats

Indias travel and tourism industry has huge growth potential. India is a large market for travel and tourism. It offers a diverse portfolio of niche tourism products - cruises, adventure, medical, wellness, sports, MICE, eco-tourism, film, rural and religious tourism. India has been recognised as a destination for spiritual tourism for domestic and international tourists. As per HVS Survey-2017, the expected future additional inventory in 11 major markets (across categories-only branded) is lower at around 57,000 rooms for the next 5 years. Therefore, with increasing demand on back of improvement in economic activities and lower room additions, major markets are expected to sustain/improve the ARRs going forward and grow at an average of 4.5% p.a. Also, the occupancy is expected to inch up to an average of about 66% by the end of FY21 compared with 63.4% in FY16. Accordingly, the hotel industry is expected to see an increase in revenue at the rate of about 11-13% CAGR over the 5 year period FY17-FY21.

GST implications on Hotel industry:

Notably, the much-awaited GST was rolled out on 1st July

2017, under which the Indian hospitality industry stands to benefit from homogeneous and uniform taxes, in addition to easy utilization of Input Tax Credit (ITC). Hotels having centralized registration will have to get registered in each state whether providing hotel services on own account or through agent (franchise).

The GST Council decided that the 28% tax would be imposed on hotel rooms with a tariff of Rs 7,500 and above. Rooms with tariffs between Rs 2,500 and Rs 7,500 shall attract 18% tax rate. Under GST regime, the overall tariffs for premium hotels (four star and above) have seen an increase, which has marginally impacted the demand.

Government Initiatives for Tourism Sector Development:

As per the Travel and Tourism Competitiveness Index released by the World Economic Forum in April 2017, India is ranked 40 among 136 economies across the world, up 12 places since 2015. In the last three years, the government has launched several key projects as well as continued some old projects of the previous government to boost the travel and tourism sector. Among its top initiatives are Swachh Bharat Campaign, electronic visa (E-visa), digital application, and Ude Desh Ka Aam Nagrik Scheme (UDAN) among others. Initiatives such as sanctioning visa on arrival (VoA) and extending electronic travel authorisation (ETA) to more countries, developing a mobile application for tourists and introducing the Incredible India multilingual tourist helpline, have definitely helped in progress and socio-economic growth. Focus on marketing of destinations in India has been an integral part of the tourism ministrys agenda and it has released several campaigns in international and domestic markets to promote various tourism destinations and products of India to increase foreign tourist arrivals and domestic visits within the country. The Government of India has launched several branding and marketing initiatives such as ‘Incredible India and ‘Athiti Devo Bhava, which have provided a focused drive to growth. Moreover, ‘Incredible India 2.0 aims at showcasing the country as a spiritual and wellness destination; with this, the country is poised to emerge as an important wellness destination in South Asia. In addition, the liberalization of the visa regime has facilitated entry of foreigners into India for tourism, business and medical purposes. E-visa for nationals of 163 countries has been a game changer and given a big boost to foreign tourist inflow. Simultaneously, the ministry is also focused on consolidating domestic tourism within India. In February 2017, the state governments of Chhattisgarh, Gujarat, Karnataka, Rajasthan and Uttarakhand signed 86 MoUs worth Rs 12196.7 crore for developing tourist destinations in their respective states. In addition, with government policies such as ‘Make in India and ‘Startup India theres more demand for travel across smaller cities. Further, the latest scheme of UDAN is aimed at giving further impetus to both domestic and inbound tourism and act as a booster for business and leisure travel.

Other Sectors:

(a) Infrastructure Sector: Infrastructure sector is a key

driver for the Indian economy. The sector is highly responsible for propelling Indias overall development and enjoys intense focus from Government for initiating policies that would ensure time-bound creation of world class infrastructure in the country. Infrastructure sector includes power, bridges, dams, roads and urban infrastructure development. In 2016, India jumped 19 places in World Banks Logistics Performance Index (LPI) 2016, to rank 35th amongst 160 countries. The Government of India is taking every possible initiative to boost the infrastructure sector and is expected to invest highly in the infrastructure sector, mainly highways, renewable energy and urban transport, during 2018.

(b) NBFC Sector: Despite sluggish economic growth, slowdown in demand and sharper bank focus on retail loans, NBFCs have been gaining market share across major asset classes. Present in the competing fields of vehicle financing, housing loans, hire purchase, lease and personal loans, NBFCs, have emerged as key financial intermediaries for small-scale and retail sectors thereby forming an essential part of shadow banking in India. NBFCs are the third largest segment in the Indian financial system after commercial banks and insurance companies and account for 9% of the total financial assets. Moreover, small and medium enterprise loans account for 10.5% share in the overall credit of NBFCs in FY17. In case of banks, MSE loans accounted for a mere 5.2%. However, NBFCs cannot access low-cost deposits like their banking peers. As such, NBFCs depend on issuing NCDs, CP and short/medium term bank borrowings for liquidity. As per CARE ratings report, for systemically important NBFCs, the liability mix comprised borrowings by way of NCDs (49%), bank loans (22%) and commercial paper (10%) and balance by way of other current liabilities.

(c) Real-Estate Sector: With a general upswing in the economy, the Indian real estate sector has also witnessed growth with rise in the demand for residential spaces in particular. Indias real estate market is expected to reach US$ 180 billion by 2020 from US$ 126 billion in 2015. The Government of India has been supportive to the real estate sector. The Government has also allowed FDI upto 100 per cent for townships and settlements development projects and real-estate projects within the Special Economic Zone (SEZ). Government of Indias Housing for All initiative is expected to bring US$ 1.3 trillion investments in the housing sector by 2025. Under Union Budget 2018-19, Pradhan Mantri Awas Yojana (PMAY) (Gramin) was allocated Rs 33,000 crore (US$ 5.10 billion) while the urban programme of the scheme was allocated Rs 31,500 crore (US$ 4.87 billion). The scheme is expected to push affordable housing and construction in the country and give a boost to the residential real-estate sector. Lately, the sector has seen a major revamp with the implementation of Real Estate Regulation

& Development Act (RERA), which has introduced transparency and accountability for developers and increased consumer confidence especially in distressed ongoing projects. In addition, the GST and the Benami Property Act will also have a major impact on how developers run their businesses. The government has also released draft guidelines for investments by Real Estate Investment Trusts (REITs) in non-residential segment, which is likely to push investment in commercial office space sector.

4. Performance

Your Company has been having satisfactory operational performance and financial indicators despite depressed market conditions for the last three years as detailed in para 3 of the Directors Report. Your Company with a view to withstand the operational and market risk associated with the industry, has been pursuing to expand its portfolio by diversifying its operations in other related sectors including entertainment and infrastructure sectors in participation with other lenders. The Company intends to grow its balance sheet size by aggressively pursuing the emerging opportunities which would enable us to leverage its capital and thereby improve return on equity.

5. Outlook

India is today the fastest growing major economy in the world. With economy expected to grow at around 8% annually and the governments support to the tourism sector, the demand for hotels and other tourism infrastructure projects is expected to improve considerably in mid-term. The growth in Indias tourism, infrastructure, industrial/manufacturing, real-estate and services sectors is expected to result in opportunities for TFCI to expand its business at a steady rate in near future.

With hospitality business gaining an organised form with the advent of aggregators in the budget and economy space, the industry players are unanimous in their opinion that it will be technology that will be playing a major role in customer acquisition going forward. It is incumbent on the hotels to keep pace with the latest technology trends and new marketing tools on the online space. Despite all the trials and tribulations in the socio-political and economic spheres in the country, the hospitality players are not overly concerned but rather hold faith in the future opportunities in the Indian market. They rest their confidence on the rapid urbanisation, improvements in the physical infrastructure, demographic changes, and above all the promises and policies of the government.

6. Risks and concerns:

The risk management philosophy and policy of the company is an embodiment of the Companys approach to understand, measure and manage risk and aims at ensuring sustained growth of healthy asset portfolio. This would entail adopting leadership approach in products and segments well understood by the Company. An innovative approach is undertaken in high-risk areas by taking limited exposure and optimizing return. The Company has robust credit risk framework which provides a scientific method for assessing credit risk rating of a client. Further, the mapping of internal rating grades vis-a-vis external

rating agencies grades has been undertaken. The output of the rating models is used in the decision making. TFCI regularly monitors portfolio distribution in terms of Low Risk, Medium Risk and High Risk categories. TFCI has been managing the following risk effectively:

Credit risk: Credit risk occurs when borrower(s), as a counter party, fails to meet its contractual obligations. Credit risk applies not only to loans, but also to other on and off-balance sheet exposure such as guarantees, acceptances and investments in securities. Project lending involves certain inherent risks in a developing economy where long-term macro-economic adjustments towards stability are still in progress. Projects under implementation are prone to time and cost overruns, sometimes due to factors beyond the control of the borrower. Project failure may also occur due to adverse market situations and/or mismanagement. Your Company is making all efforts to identify such risks and factors by constantly reviewing and improving appraisal techniques, sensitivity analysis as well as other factors i.e. Projects ability to withstand changes, expertise and experience of the borrowers to cope with the adverse situations. Your Company continues to give utmost priority to its credit appraisal, intense monitoring and supervision of the projects on a continuous basis.

Interest-rate risk: Interest-rate risks arise out of mismatches between interest-rate-sensitive assets and liabilities. The Company manages such risks by fixing lending interest rates at a level linked to its average cost of borrowings and by constantly monitoring the maturity pattern of its assets and liabilities.

Liquidity risk: Liquidity risk arises out of lack of

adequate funds in its day-to-day operations. The Company manages the liquidity risk through prudent resource planning to ensure the availability of adequate funds at all times to meet its obligations on its liabilities as well as disbursements on due dates.

7. Discussion on financial performance/ Internal control systems and their adequacy

The Financial and other operational performance of the Company under review has been discussed in detail in the Directors Report.

8. Material Developments in human resources/industrial relations front, including number of people employed

Financial Services sector is a knowledge intensive sector where employees skills form a critical aspect in proper service delivery. The nature of your Companys business requires trained employees. In pursuance of the Companys commitment to develop and retain the best available talent, the Company had been regularly sponsoring the employees for training programmes organized by professional institutions for upgrading the skill and knowledge in different functional areas. Your company has offices in Delhi and Mumbai to provide effective & prompt service to the clients and also for constant follow-up with assisted units in these regions. The work force strength of your Company as on March 31, 2018 was 30.