Enabling India to bank on electric vehicles

Priority sector lending, adequate financing and a sustainable borrowing mechanism can propel India’s EV dreams Smooth access to finance is an impediment in the sale of electric CVs, with banks wary of lending and worried over their resale and residual value in the event of default

By Sudhir Mehta

Investments and innovation are driving India’s electric vehicle (EV) adoption. The country has set a target of 70% EV sales penetration for commercial vehicles (CVs), 30% for private cars, 40% for buses, and 80% for two- and three-wheelers, by 2030.

CVs are leading the growth for EVs. Their lower total cost of operation (TCO) makes the transition to EVs economical, sustainable and sensible. Affordable and seamless financing of electric CVs, mostly purchased by governments, fleet owners and drivers, is needed. Smooth access to finance is an impediment in the sale of electric CVs, with banks wary of lending and worried over their resale and residual value in the event of default.

While for most use cases EVs have a lower TCO than the conventional internal combustion engine (ICE) vehicles, their upfront cost presents a barrier. When financing is available, high interest rates, short tenures and low LTV (loan-to-value) ratios present a significant burden. This is contrary to ICE vehicles that receive affordable financing. Lower interest rate LTV will be critical to driving EV sales. Also, even when financing of EVs is available, EV buyers are unable to obtain viable terms, i.e. interest rates and tenures that are comparable to ICE vehicles. EXIM and other low-cost credit support is needed to develop the export market for such vehicles. The Chinese EV industry has been successful because institutions like the Sinosure have been providing them with long-term export credit and facilities for export.

With newer ownership and operation models for electric CVs—such as OpEx (operational expenditure model where the seller runs the vehicle in exchange for a per-km fee) for e-buses—the projects require huge working capital. In gross cost contracts, dry leasing and net cost contracts—where projects are capital intensive—financial institutions should be enrolled with lower borrowing rates to ensure timely finance availability, risk management, and timely project execution and deployment. Today, most EV projects are facing delays due to unavailability of financial assistance. A green and sustainable borrowing mechanism is needed, perhaps with the help of institutions like the World Bank or the International Finance Corporation that will lend to institutions at international rates, which will bring down the cost of borrowing.

The NITI Aayog and the World Bank are setting up a $300-million first-loss risk-sharing instrument. It is intended to act as a hedging and guaranteeing mechanism that banks and NBFCs can access in the event of payment delays on EV loans.

The inclusion of clean, green and sustainable technologies under priority sector lending (PSL) can expedite faster adoption of EVs (like how solar and renewable energy solutions for households were included within PSL guidelines in 2012, which widened the scope of lending to larger installations and renewable energy-based public utilities). Including EVs in the RBI’s PSL guidelines can complement the $300-million facility and encourage the financial sector to mobilise necessary capital.

Countries like Australia, the UK and the US are also recognising this challenge and are introducing supportive measures to facilitate easier financing of EVs. Priority sector status to EVs in India can address the lack of availability of finance and is a crucial pathway to helping realise the segment potential while institutionalising the importance of the EV sector within the finance industry. We are at the cusp of a paradigm shift in the auto sector, and closer collaborations between governments, OEMs and financial institutions can transform the ecosystem.

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