Why India's banks are the missing piece to its aviation ambitions

In brief:

A recent off-the-record conversation with an aviation executive raised a question I hadn't thought much about before. India is building an aircraft leasing ecosystem, but who finances everything else? As airlines and lessors grow, access to competitive bank financing becomes just as important as access to aircraft. This piece explores why that part of India's aviation ecosystem has developed more slowly, why it matters for the industry's next phase of growth, and who is likely to change this.

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India has over 1,500 aircraft on order and has taken several important steps to strengthen its aviation financing ecosystem. GIFT City is working towards attracting aircraft leasing activity, and India's largest airlines have only recently started financing aircraft through domestic structures using their own subsidiaries.

However, during an off-the-record conversation I had with an aviation C-suite executive recently, one issue kept resurfacing. India's banks have not kept pace with its airlines. An airline here can order a fleet of aircraft, but when it comes to funding everything else that fleet needs to actually fly, hiring and training crews, opening a new city, keeping enough cash on hand while a new route finds its footing, that money still comes almost entirely from the airline's own investors or from lenders overseas. Even if the capital is lent from India’s banks, it either comes with a foreign co-lender, government guarantee, and/or a large creditworthy promoter. In most mature aviation markets, a bank with a specialist aviation lending desk would carry part of that load. In India, that role barely exists yet.

Additionally, much of what an airline pays for, aircraft, leases, engines, spare parts, is priced in dollars. Almost everything an Indian airline earns, ticket sales, cargo revenue, is collected in rupees. That mismatch means every time the rupee weakens against the dollar, the same lease payment costs more in rupee terms, even if the airline's underlying business has not changed at all. A domestic bank able to lend in rupees against an airline's growth would not remove that mismatch, but it would give airlines and lessors more room to manage it instead of absorbing the full currency swing on their own. That same gap shows up well before a new aircraft earns a rupee of revenue: crews recruited and trained, stations opened, ground equipment procured, maintenance capability built, and months of working capital funded while a route finds its footing. Almost none of that comes from an Indian bank either.

Why this matters beyond GIFT City

Earlier this year, Aeraltus examined why Indian airlines still rely heavily on Dublin despite the creation of GIFT (Gujarat International Finance Tech-City). The conclusion was that India is gradually building the legal and regulatory foundations for aircraft leasing, but access to competitive capital remains one of the constraints that determines whether an independent leasing ecosystem can develop at scale.

Capital pricing matters because aircraft leasing is fundamentally a spread business. AerCap, one of the largest global lessors, can raise capital in the bond markets at investment-grade rates. That access exists because AerCap has decades of comparable data on aircraft loss rates, recovery outcomes in default, and lessor performance under stress, the kind of history that lets a rating agency and a bond investor price the risk with confidence. GIFT-based entities do not have that history yet. Without it, funding either costs more or comes in smaller amounts, which directly limits how large a portfolio a GIFT-based lessor can build before running into the same promoter-capital ceiling.

Several practitioners I spoke with suggested that independent Indian lessors begin encountering capital constraints once portfolios reach roughly 15 to 20 aircraft, because growth continues to rely largely on promoter funding. Whether that threshold is fifteen aircraft or twenty-five is less important than the underlying pattern. At some point, internally generated capital becomes insufficient, and access to competitively priced debt becomes the limiting factor.

How the same financing structure affects airlines

The consequences are visible even at the top of the market. IndiGo reported a net loss of ₹2,582 crore in one quarter after a 1.7 percent depreciation in the rupee increased the accounting cost of its approximately US$9 billion dollar-denominated lease exposure. The airline remained operationally profitable, but foreign exchange movements overwhelmed those operating gains.

IndiGo has one of the strongest balance sheets in Indian aviation. If currency exposure remains material for the country's largest airline, the financing challenge becomes even more pronounced for smaller carriers with less financial flexibility and fewer funding options.

Developing a deeper domestic financing ecosystem would not eliminate currency risk, but would gradually reduce the industry's dependence on overseas capital and allow a greater share of aviation financing to develop within India.

Why banks have been slow to enter aviation

The absence of large-scale domestic aviation lending from Indian banks should not simply be read as a lack of risk appetite. Lending against aviation assets takes direct experience, assessing what an aircraft is worth, what a bank can recover if an airline defaults, what a route's economics actually look like, and what a fair price for that risk is. Banks build that experience one transaction at a time.

Established aviation finance markets have accumulated that experience through decades of transactions. India's banking sector has had far fewer opportunities to build comparable knowledge, because much of the country's aircraft financing has historically been arranged offshore. The result is a reinforcing cycle: limited lending produces limited experience, and limited experience reduces the incentive to expand lending capability.

Lending money is not the same as judging the risk yourself

Indian banks are already present in aviation finance. For example, Bank of India co-arranged Air India's $215 million GIFT City term loan alongside Standard Chartered in 2025, and India's largest carriers have also drawn on government-backed schemes like ECLGS (the Emergency Credit Line Guarantee Scheme, a program where the government covers most of a loan's losses if the borrower defaults) during periods of financial stress. On the surface, this looks like exactly the capability the industry needs.

However, when one looks closer at how that lending is structured, a different picture appears. The Air India loan was arranged jointly with a foreign bank that brought the aviation expertise, secured against specific aircraft, and priced in dollars. Crisil (one of India's major credit rating agencies, which scores companies on how likely they are to repay their debt) reaffirmed Air India's bank loan facilities at AAA, its highest possible rating, in December 2025. Crisil's own rationale states plainly that the rating rests on Air India's financial flexibility from being part of, and managed by, the Tata group, not on Air India's own standing as an aviation business. ECLGS lending carries a government guarantee covering most of the losses if the airline defaults. In each case, an Indian bank is willing to lend because someone else has already done the hard part. A foreign co-lender with decades of aviation experience, a AAA-rated parent company, or the government has assessed the aviation risk and effectively vouched for it.

That is a different thing from a bank deciding, on its own, using its own judgment, that an airline or lessor is worth lending to. The way a bank would evaluate a real estate loan or an infrastructure project on its own terms, weighing what the asset is worth, what happens if the borrower defaults, and what a fair price for that risk looks like. No Indian bank is yet doing that for aviation without a foreign partner, a strong parent company, or a government guarantee standing behind the deal. Until that changes, the sector has learned how to participate in aviation lending. It has not yet learned how to judge aviation risk for itself.

The gap RBI hasn't closed

Indian banks are not simply choosing not to lend against aviation risk. A bank's risk committee approving an aircraft-backed loan needs clear answers to specific questions before it can sign off: how is this asset classified on the bank's books, what provisioning does it carry, and what is the bank's actual procedure if the airline defaults and the aircraft needs to be recovered, maintained, and redeployed.

None of those questions currently have a clean answer inside Indian banking regulation. A government working group set up under the Ministry of Civil Aviation, in its Project Rupee Raftaar report, said as much directly. It called for the Reserve Bank of India (RBI), alongside SEBI (Securities and Exchange Board of India) and the insurance regulator IRDAI (Insurance Regulatory and Development Authority of India), to make specific regulatory changes before aircraft financing and leasing could function as a proper asset class in India.

Indian finance leases are also classified as External Commercial Borrowings, which require RBI approval before an airline or lessor can even structure the deal. The Protection of Interests in Aircraft Objects Act (PIAO) gave lessors a clearer legal path to repossess an aircraft when a lease fails and is currently facing a live test, but that is a separate question from what happens next on a bank's own balance sheet, how the asset is classified, and what provisioning applies. That second question sits with the Reserve Bank of India, instead of the IFSCA (International Financial services Centres Authority) or the aviation regulatory framework GIFT City falls under.

Until the RBI publishes that framework, a bank's credit committee has no defined answer to the question that actually blocks approval. The absence is not a sign Indian banks lack interest in aviation. India has built the first half of this picture, the legal right for a lessor to repossess an aircraft under the PIAO Act. It has not yet built the second half, the part that tells a bank what to do with that aircraft once it has it back, how to value it, provision for it, and recover against it.

An alternative path does not depend on RBI moving first. GIFT's own registered banking units already sit inside a regulatory structure the IFSCA controls directly, separate from RBI's mainland banking framework. Whether that separation is real enough to let GIFT banking units build aviation-specific lending capability, classification, provisioning, recovery procedures, on their own, without waiting for RBI to act, is the open question that determines whether GIFT can unlock this independently or whether it is waiting on a regulator that has not yet engaged.

Who moves first

The gap identified above sits with the Reserve Bank of India (RBI). But GIFT City was deliberately built around a different regulator instead of the RBI. The International Financial Services Centres Authority (IFSCA), which licenses and governs the banking and leasing entities operating inside GIFT City, is the authority. It is exactly why aircraft leasing has been able to develop there ahead of the broader Indian banking system. The IFSCA's own bulletin noted Indian bank IBUs, International Banking Units, the entities it licenses to lend inside GIFT City, participating in secondary aircraft transactions for the first time in early 2025. That is real movement, but it is participation in someone else's deal structure, instead of origination.

Whether IFSCA's existing authority over GIFT banking units extends far enough to let them build their own aviation risk framework, classification, provisioning, and a recovery procedure, independent of RBI's mainland banking rules, is not yet established. IFSCA has used that independence to build a leasing ecosystem inside GIFT City. It has not yet shown whether it will use the same independence to build a lending ecosystem. That is the open question that determines whether GIFT can unlock this on its own, or whether it is waiting on the RBI framework described above regardless.

Closing thoughts

India's aviation ambitions increasingly extend beyond carrying passengers. The country wants to finance aircraft, lease aircraft, and build globally competitive aviation businesses and hubs. GIFT City has already delivered a working legal framework for repossession under the PIAO Act, amending tax treaties and tax benefits and a functioning structure for captive leasing subsidiaries. What it has not yet delivered is an Indian bank willing to lend against aviation risk on its own judgment, without a foreign co-arranger, a strong parent company, or a government guarantee standing behind the deal, to an independent lessor or airline.

Watch for two things. Does the Reserve Bank of India actually publish the aviation asset classification and provisioning framework the Rupee Raftaar report called for? And once it does, does a GIFT-based bank or an Indian DFI use it to extend a real growth-stage loan, judged on its own aviation risk assessment rather than a foreign co-arranger, a strong parent, or a government guarantee? More importantly does it lend an independent Indian lessor or a non-legacy carrier within the next 12 to 18 months?

If both happen, this thesis does not hold. If the RBI framework stays unpublished, or banks keep lending only where someone else has already absorbed the risk, it confirms India's aviation financing ecosystem is bounded by regulatory capability, instead of market demand. That ceiling will hold exactly when the order book or capacity expansion needs it not to.

Author's Note and About Aeraltus

This analysis is based on public information including Crisil rating rationales, IFSCA bulletins, government working group reports, company disclosures and news reporting, off-the-record conversations with aviation executives and practitioners, and Aeraltus prior analysis. Aeraltus does not hold a position in Air India, IndiGo, Bank of India, Standard Chartered, AerCap, Tata Sons, or any related entity.

Aeraltus produces structural aviation analysis and intelligence on emerging markets across Asia and Africa. Custom analysis is available for institutional investors, airline strategy teams, lessors and corporate development groups. Contact info@aeraltus.com.

Sources

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