Bankrolling EVs

Priority sector lending could help scale up India’s EV plans

The electric mobility space in India has received significant attention from governments and industries over the past few years. India’s EV30@30 initiative targets a 30 per cent sales share for electric vehicles (EVs) by 2030. As per a report by NITI Aayog and Rocky Mountain Insti­tute (RMI) in 2021, the EV segment presents a huge investment opportunity of $266 billion. Co­nsequently, public budgetary allocations and corporate investment in EVs have inc­reased manyfold. Se­veral state governme­nts have rolled out EV policies that provide fiscal incentives for EVs, charging infra­str­uc­ture and manufacturing. This has allow­ed EVs to ac­hie­ve cost parity with internal combustion en­gine (ICE) vehicles in multiple use cases. Manufac­turers are also acti­ve­ly in­vesting in indigenous manufacturing and supply chains. While the progress has been significant, financial challenges continue to exist. Lending has not picked up as ex­pected and investor confidence is still relatively low in EVs.

NITI Aayog, RMI and RMI India have re­cently published a report titled “Banking on Electric Vehicles in India: A Blueprint for Inclusion of EVs in Priority Sector Len­d­­ing Guidelines”. The report proposes con­siderations for the design of guidelines for including EVs in priority sector len­ding (PSL), and summarises actions needed to implement and ensure the success of EVs as a priority sector. Renew­able Watch presents the key observations and outcomes of the report…

Key capital commitments for electric mobility in 2021

The year 2021 saw several developments in terms of capital deployment in the EV sector. The Department of Heavy Indus­try, Government of India, revised the Fas­ter Adoption and Manufacturing of Elec­tric Vehicles Phase II demand incentives for electric two-wheelers from Rs 10,000 per kWh to Rs 15,000 per kWh. The in­centive cap was increased from 20 per cent to 40 per cent of the capital cost of electric two-wheelers.

The government also introduced the production-linked incentive (PLI) sc­heme. Under the scheme, $2.4 billion was ap­pro­ved for investments in advanc­ed ch­emistry cell (ACC) battery manufacturing and $3.5 billion was approved for automotive manufacturing focusing on EVs and hydrogen fuel cell vehicles. Many sta­te governments, such as those of Assam, Goa, Gu­jarat, Hi­machal Pradesh, Megha­laya, Od­isha, Ra­j­as­than and West Bengal notified and rolled out their respective EV policies. Maha­rashtra and Karnataka also revised their EV policies to offer additional de­ma­nd, supply as well as charging infrastructure and capital subsidies.

E-commerce fleet operators and aggregators, including Amazon, Capgemini, Dal­mia Cement, JSW Cement and Zoma­to also made new commitments towards 100 per cent electrification of their fleets in India between 2030 and 2040. In 2021, original equipment manufacturers and EV component and battery manufacturers such as Ashok Leyland, Mahindra & Mahi­ndra, Omega Seiki Mobility, Simple Ener­gy and Tata Motors announced in­vest­ments worth over $6.5 billion in EVs, EV components and battery manufacturing; EV  supply equi­p­ment (EVSE); rese­ar­ch and development; and deployment. Companies such as Hero Electric, Ma­gen­ta and Ola Electric raised venture fun­ding of nearly $446 million for EV/component/battery manufacturing and EVSE in 2021. Financial institutions such as Axis Bank and the UK’s Private Infrastructure Development Group anno­un­c­ed a capital financing guarantee of $200 million to­wards manufacturing, dis­tri­­bution and servicing of EVs, batteries, components and charging infrastructure. NITI Aayog and the World Bank are also se­tting up a $300 million first-loss risk sh­a­ring instrument. The instrument is intended to act as a hedging and guaranteeing mechanism, which can be accessed by banks and non-banking finance companies (NBFCs) in the event of payment delays on EV loans. The programme is expected to bring down the financing cost of EVs by 10-12 per cent.

Challenges and risks in financing EVs

The government’s flagship initiatives such as FAME II, PLI for ACC batteries and au­to­motive manufacturing alone total $7.5 billion. Private companies have also esta­blish­ed a stronghold in the market. Ola El­ec­tric, for instance, is currently worth $3 billion. Despite various public and private se­c­tor investments and initiatives in the EV ecosystem, there are certain challenges, especially in terms of raising capital and ensuring overall profitability. In terms of sa­les, EVs represent a little over 1 per cent of the market. Moreover, retail le­nding to su­pport consumers and institutions in fi­nancing EVs has been slow to pick up.

Financial institutions have increased lending as per the requirement to meet India’s 2030 goal. This would entail an estimated investment of $5 billion by 2025 and $50 billion by 2030. Since EV technology and adoption are at a nascent stage, financial institutions such as banks and NBFCs are not lending to EVs due to various risks that dampen their confidence in the sector. These include operations and maintenance risks, customer risks, utilisation risks, business model risks, asset risks, te­chnology risks, policy risks, manufacturer risks and resale risks. High interest rat­es are also a pertinent issue as interest rates of 20 per cent or more exist in the se­gment, almost twice that of petrol and die­sel vehicles. Low loan-to-value ratio is an­other challenge as the down payment for EVs is in the range of 25-50 per cent, including capital-intensive e-buses. Fur­th­er, at present, there are very few dedicated EV loan products available, including e-rickshaw loans and the State Bank of India’s (SBI) Green Car Scheme, limiting the financing options in the segment. Even if financing is available, EV buyers are unable to obtain interest rates and te­nors comparable to ICE vehicles.

Priority sector lending to catalyse EV finance

PSL has the potential to institutionalise the role of finance in India’s EV transition. The PSL guidelines from the Reserve Bank of India (RBI) mandate that scheduled commercial banks allocate specific levels of bank credit towards priority sectors. Off-grid solar and renewable energy solutions for households were included in the PSL guidelines in 2012. In 2015, renewable en­ergy was included as a priority sector. In 2019, public sector banks led by SBI re­quested priority sector recognition for retail lending to EVs.

Including EVs as a priority sector has the potential to increase investor confidence as it complements the central and state governments’ existing plans and policies. Inclusion can directly incentivise banks to enhance lending as a part of priority sector targets. Banks that have not yet ventured into EV financing may consider do­ing so. Banks that already finance EVs may be motivated to create specialised financing options with lower interest rates and longer loan terms.

Overall, a mechanism to encourage a high supply of credit can motivate borrowers opting for informal sources of financing, especially for e-rickshaws, to se­ek bank financing. The inclusion of EVs could allow NBFCs to leverage their gr­e­ater on-ground presence and benefit from banks contributing low-cost funds. In addition to the direct impact of increasing the formal supply of credit, making EVs a priority sector can help institutionalise the asset class into the industry. As with any new regulation or provision, banks will be encouraged to build their understanding of EV technology, policy and business mo­dels. The limited awareness of the EV industry has led to greater risk perception and thus underfinancing in the past. The system-wide shift in mindset could be a powerful catalyst in India’s EV transition.

The way forward

Finance will be critical to achieving India’s electric mobility goals at the desired sc­ale. However, the real and perceived ris­ks of a relatively new asset class have discouraged financial institutions such as banks and NBFCs from financing the sector. In­cluding EVs as a priority sector is a crucial near-term solution for boosting financing. To ma­ximise the impact of the reform, supportive mechanisms will also be required.

A few interventions in the PSL framework could rapidly increase lending. Under the PSL guidelines, a sub-target encompassing renewable energy and EVs could incentivise lending in these sectors by cr­ea­­ting a clear target and penalty mechani­sm for banks that fail to expand their lending to these sectors. Further, EVs may be included as an infrastructure subsector, which can receive certain financing and taxation benefits, in order to lower the cost of credit and improve flexibility for inves­to­rs. This also has the potential to create an enabling environment for large investments in the sector such as EV and battery manufacturing, charging infrastructure de­ploy­ment, and electric bus roll-out.

Currently, no data is available regarding the number of EV loans granted, outstan­ding advances, or non-performing ass­ets. This information asymmetry in the industry is a barrier to understanding the financing patterns and thus improving the flow of finance. To solve this problem, RBI can incorporate EV loans as a uni­que reporting category under personal loans in the basic statistical returns. In the long term, constituting EVs as a separate re­porting category may create a market for specialised EV loan products with lower interest rates and longer te­nors. A supportive taxonomy on sustainable finance, already being worked on by the Ministry of Finance, is also ex­pec­ted to further support the mainstreaming of EVs in the financial industry. PSL helps improve the supply of credit, but does not directly address challenges such as in­terest rates and equated monthly ins­talments. In the short term, interest rate subventions can play this part, while in the medium to long term, there is a ne­ed for solutions such as loan guarantees that reduce inherent risks.

India’s EV finance market has the potential to reach $50 billion by 2030, and PSL can be a key pathway to help realise this potential.

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