The government has proactively promoted electric vehicles (EV) through various policies. It launched the Faster Adoption and Manufacturing of (Hybrid and) Electric Vehicles (FAME) India scheme to create EV demand. In addition, the National Mission on Transformative Mobility and Battery Storage and the recent National Programme on Advanced Chemistry Cell Battery Storage under the production-linked incentive initiative are expected to benefit the EV market. Despite the policy impetus, several issues are still preventing the uptake of EVs. Apart from the high upfront cost, limited charging infrastructure and lack of consumer awareness, financing remains a key hindrance. High interest and insurance rates, the risk-averse behaviour of financial institutions and limited availability of specialised financing options are the key financing issues.
A report by NITI Aayog and the Rocky Mountain Institute, “Mobilising Finance for EVs in India: A Toolkit of Solutions to Mitigate Risks and Address Market Barriers”, talks about the financing landscape of EVs in India, the key financing barriers and their underlying reasons. It also offers policy suggestions for different stakeholders.
Renewable Watch presents an extract from the report…
Key financing barriers to EV adoption
High interest rates are the biggest barriers to EV adoption. Interest rates for EV loans tend to be even higher than those for internal combustion engine (ICE) vehicles. The report mentions that for a privately operated electric car in Delhi, banks charge a marginally higher interest rate than for a conventional vehicle. However, for a commercially operated electric car, they could charge up to 14-15 per cent interest, compared to 12 per cent for a diesel car. The difference is more significant for electric two-wheelers, as the interest rates can be even higher than 20 per cent. This adds to the ownership costs for vehicle owners.
Another key issue is that banks offer loans for EVs with only partial financing and a low loan-to-value (LTV) ratio to mitigate the risk. With a low LTV ratio, a financier can recover substantial costs in case of borrower default despite a potentially low resale value. Therefore, there is a grim possibility that small operators or drivers will be forced to seek unsecured high-interest supplementary loans from the unorganised sector. The problem has worsened with the onset of the Covid-19 pandemic, as the fear of default has lowered LTV ratios even more.
There is a limited availability of financing instruments in the Indian EV market. The SBI Green Car Loan scheme is one such option. Operators are forced to choose loans with high interest rates, low LTV ratios and shorter repayment periods. Furthermore, in cases where the credit history of the borrower is unavailable or unreliable, banks and NBFCs even ask for collateral for EV loans, in addition to the vehicle.
Apart from these financing concerns related to procurement of the vehicle, EV owners pay higher insurance than owners of conventional models. Since a vehicle’s insurance cost is based on its capital expenditure, the higher the upfront cost, the higher the insurance premiums. The report highlights that the cost of insurance for a privately owned, commercially registered, self-driven EV in Delhi is Re 0.29 per km. Meanwhile, for an equivalent diesel ICE vehicle, it is Re 0.18 per km.
Key reasons for these barriers
The fundamental factors behind the financing barriers have been categorised as asset risk and business model risk. Asset risk pertains to the vehicle being financed, while business model risk relates to the bankability of the borrower’s credit profile, expected utilisation and operational patterns.
Financial institutions are risk-averse due to the lack of reliable data on EV performance in terms of range, asset life, maintenance requirements and load capacity, especially in the Indian context. Insurers are equally risk-averse. The lack of guarantees or warranties from manufacturers is perceived to be a key reason behind this. Over the past five years, battery technology has advanced significantly, and EV technology continues to improve. Some financial institutions are concerned that the assets they are financing today could become obsolete in the future, similar to smartphone technology. The lack of awareness regarding incentives provided in national- and state-level policies exacerbates the issues in the market.
Another fundamental issue is the limited availability of good EV original equipment manufacturers (OEMs). Even the available OEMs lack historical data on a product’s performance. In addition, a key concern is that OEMs may be selling EVs at low or negative margins due to the high capital cost, creating a risk associated with their balance sheets. Therefore, lending to OEMs is a risky proposition for banks.
In the Indian context, another major concern is that EVs have a reduced resale value due to the nascent ecosystem and lack of a secondary market. This directly contributes to higher interest rates and low LTVs. Other risks associated with EVs, such as major policy changes or poor technological performance, also contribute to the fear that EVs will have low resale values.
The operational aspects of EVs, such as battery replacement, voltage fluctuations or the technical requirements of charging infrastructure, are yet to be understood in India. An EV’s life cycle may be reduced due to the lack of awareness around maintenance requirements and patterns. Improper maintenance due to the absence of trained mechanics is also likely to reduce the resale value.
Business model risk
A key business model risk relates to utilisation. Unlike ICE vehicles, EVs have a high capital cost with low operating expenses. Therefore, EVs are most viable at high utilisation levels. For commercial operators, the bankability of an EV depends on the bank’s confidence in projected cash flows. This requires the establishment of new business models in India.
For fleet operators, utilisation depends on drivers being able to use charging stations, which are still being set up across cities. Home charging is not a viable option for drivers due to grid reliability and parking challenges. Such uncertainty and risk can lower financial institutions’ confidence in financing fleets. Also, many individual drivers are first-time loan takers from the organised sector. Therefore, they lack credit history. Criteria such as personal and family history, place of residence, or education level may not be inclusive of first-time borrowers, increasing the risk they represent.
For financial institutions, reorientation and retraining of employees in EV financing present significant resource and time constraints. Moreover, the NBFC sector has been facing a liquidity crunch since late 2018 following the bankruptcy of Infrastructure Leasing & Financial Services. Post this crisis, funding for vehicle financiers has tightened, leading to less lending and increased risk aversion.
But there are some positive developments in this space. New fintech-based EV lending models, such as Delhi-based RevFin and Bengaluru-based Three Wheels United, have enabled access for high-risk customers.
Suggestions for stakeholders
The report provides various policy suggestions to solve the financing issues in the EV market. These include:
- The inclusion of EVs in the Reserve Bank of India’s priority sector lending.
- Interest rate subvention on EV loans, which will improve the affordability of loans. This has already been enacted in other sectors and at the state level for EVs in Delhi.
- Product guarantees and warranties by OEMs on product performance, which will reduce the uncertainty associated with EV models.
- Government- and multilateral-led risk-sharing mechanism to partly or entirely cover the possible losses associated with financing EVs. Such a mechanism will distribute the risk and provide financial institutions with an opportunity to build trust in the sector.
- Fleet operator-led risk-sharing mechanisms to provide partial credit guarantees and utilisation guarantees to drivers.
- Industry-led buyback programmes and battery-repurposing schemes to build a secondary market for EVs. This would improve the residual value of EVs, providing financial institutions with an option for resale in case of borrower default.
According to the report, India’s weighted average EV sales penetration has the potential to reach about 70 per cent in 2030 across segments. The estimated cumulative capital cost of India’s EV transition will be around $266 billion by 2030. The estimated size of the organised EV finance market will be $50 billion by 2030. The policy suggestions mentioned in the report will be of great help in meeting such ambitious numbers and in creating a positive financial ecosystem for EVs in India.