PSBs explore aircraft finance arm at GIFT

Several public sector banks, including the country’s largest lender State Bank of India (SBI), is in talks with the government to set up aircraft leasing arms at the International Financial Services Centre (IFSC) in GIFT City (Gujarat), two people with direct knowledge of the matter told Mint.

The State Bank of India is exploring setting up a new line of business of aircraft leasing at the GIFT city, a senior official with the bank said under the condition of anonymity.

“SBI has been financing airlines but not leasing aircraft. Due to the current circumstance, banks are not keen to finance airlines though the sector is expected to bounce back after the pandemic,” the person said.

“At the moment, SBI is looking at aircraft leasing and tax issues around the business. We are looking at it (aircraft leasing), and take a call depending on the viability model,” the person added.

Queries sent to SBI spokesperson however remained unanswered till press time.

Large Indian public sector banks like the SBI have been financing airline companies to buy aircraft. However, under current regulations such banks are permitted to do only aircraft debt financing.

But, this is set to change with the International Financial Services Centre Authority (IFSCA), the regulator for GIFT city, coming out with draft regulation to allow financial services companies to carry out aircraft leasing transactions.

IFSCA has allowed banks to open aircraft leasing business in GIFT city, said an IFSCA official, requesting anonymity.

“Non-financial entities can also take a licence and start the business or opt for a joint venture with foreign lessors or set up a wholly owned subsidiary for conducting the business,” the official said.

“The regulator is providing parity with other IFSCs in terms of waiving the capital gains tax, GST etc,” the official added.

As of November 2020, Indian airlines have over 700 aircraft in its fleet, according to data from the Economic Survey 2021-22.

Major Indian airlines, including the top domestic operator IndiGo that have a huge aircraft order book, conduct sale and lease-back (SLB) of planes to remain asset-light and profitable.

An SLB is a transaction in which the owner sells the aircraft and then takes it back on lease from the buyer. This kind of deal typically removes the aircraft and its associated debt from the carrier’s balance sheet.

Indian carriers also regularly lease planes from foreign lessors from Ireland, Dubai (UAE), and China, among others.

In a bid to attract aircraft lessors to set shop in India, the government had earlier this month in its union budget rolled out tax incentives and other benefits including tax holidays on capital gains for companies setting shop at the GIFT City.

The government however wants to eventually regulate the business of aircraft leasing. To this end, it is aso in discussion with leading Indian banks including the SBI to set up a leasing arm at the GIFT city, said a senior official at the civil aviation ministry requesting anonymity.

“It currently appears that foreign lessors are financing the entire aircraft leasing business in India. In order to provide a level playing field, tax exemptions for aircraft leasing companies have been provided to the Gift city,” the official said.

“Lease transactions need to be regulated. Thus, this can be monitored (at GIFT City) and we can also see the feasibility of it,” the official added.