There’s a huge untapped potential for growth in aviation financing

Indian markets may not have huge depth to support 900-odd aircraft acquisition, wet or dry leasing of these machines. And, Indian banks that are neck deep with Rs 10.82 lakh crore non-performing assets have serious constraints in supporting large leasing finance deals. With top officials at Punjab National Bank (PNB), Bank of Maharashtra and ICICI Bank and non-banking finance companies facing corruption charges, both private and public sector banks may not be in a position to finance aircraft acquisitions.

Without these aircraft, the Indian aviation business may not sustain the healthy double-digit growth reported in the last few years. In fact, more orders for aircraft are likely to be placed, once prime minister Narendra Modi’s plan for regional connectivity takes off in full swing. Moreover, 30 per cent ageing aircraft currently operated by half a dozen large players may need replacement as well.

In such a scenario, the government will have no option but to evolve a policy framework with alternative funding options. The best bet for mobilising funds worth about $50 billion would be long-term pension funds and insurance companies. Given the limited spread of private pension funds and insurance players in India, large foreign funds in the US, Europe and South East Asia will have to be tapped through joint ventures. For that to happen smoothly, the regulatory framework will have to be tweaked by PRFRDA and Irda with support from the finance ministry.

The shipping industry, large airports, ports and road projects could be other major areas where big financing and leasing deals have the potential in India for participation by global majors. In fact, acquisition and leasing of large mercantile ships have taken place with support from companies abroad. This can happen on a larger scale with big ticket deals in the aviation sector.

This will not happen quickly. As reported in this newspaper, a roadmap for alternative sources of funding with aircraft as an asset class needs to be put together. Cross border hedge funds, private corporate trusts, pension funds with risk appetite, NBFCs and high net-worth individuals should be roped in to participate in expanding aviation business, both airline services and cargo movement.

Unless a favourable and modest taxation regime is put in place, India’s participation in large global aircraft and leasing deals may become circumspect. Bringing down cost of funds, untenable stamp duties and transaction costs could be an imperative to make India an attractive destination for large financing deals. Fiscal policy regime needs to be competitive vis-à-vis countries like Ireland, established players with billions of dollars in turnover. As per one estimate, Irish lessors manage aviation assets worth over $100 billion. This translates to about 22 per cent aircraft fleet globally financed from Ireland and about 40 per cent leased out this country giving India the blushes. However, given that low-cost markets like China are already nearing saturation, India has a big chance.

The aviation ministry has pointed to credit risk and India jurisdiction risk. On both counts, there may not be much substance given that India is the most happening major economy globally and credit defaults especially with foreign lenders have rarely happened.

Given the huge untapped potential for growth in aviation financing and leasing opportunity of $5 billion annually must propel large deals in India. Several foreign financiers have clinched India specific deals abroad. But, bringing these transactions home is the challenge. Building a comprehensive eco-system for aviation deals is the way out.