India’s automobile sector, specifically, its consumers, has long depended on third-party financing. The personal loan segment grew by ~16 per cent in May 2022, and vehicle loans significantly contributed to this. However, as policies aim to decarbonise this market, we expect electric vehicles (EV) to move from the margin to the mainstream in the coming decades. Access to adequate capital will be one of the critical pillars in kickstarting India’s EV transition and future growth. However, most EV loans carry high-interest rates, shorter tenures, and low loan-to-value (LTV) ratios, all extended by the few financiers covering the market today. Overcoming these problems involves the identification of potential roadblocks to access finance, reducing its cost, and mapping the solutions followed by their implementation.
While some of the primary causes circle back to the newness of the market, several factors deter the flow of capital toward consumer financing in EVs. Some significant roadblocks and solutions are as follows:
Higher cost of vehicles – Most electric vehicle categories, to date, have higher upfront costs when compared to their traditional counterparts. In these categories, therefore for the same set of consumer profiles, EVs are considered less favourably by financiers than conventional vehicles. While specific types such as two- and three-wheelers may have attained parity in the total cost of ownership, this has done little to increase their eventual access to finance. The higher penetration of EV loans will require developing new loan products and credibility assessment frameworks focused on the cash flow approach.
Uncertainty of resale value – Electric vehicles, as a segment, suffers considerably from uncertainty regarding resale value in the secondary market. Though this hindrance will solve with time and market experience, the lack of understanding surrounding this aspect may contribute to financiers’ general wariness and leads to a higher cost of EV loans today. However, EV manufacturers rolling out buyback schemes can help improve financiers’ confidence.
Unknown probability of default – The two- and three-wheeler segment leads India’s EV narrative. A large chunk of this market consists of electric rickshaws that improve last-mile connectivity. Since these segments remain largely unregulated, with no formal income proof and usually lack a credit history, which leads to higher risk perception, it thus increases the cost. It also hinders access to loans for an EV purchase. Limited period credit guarantees focused on EVs could help financiers to extend the affordable loan to EVs.
Evolving technology - In the existing context, the uncertainty surrounding the life of batteries and their safety is a significant concern for both EV adopters and financiers. Over time, improved battery technologies could bring down the cost of EVs and resolve the fire hazards associated with this sector – thus making EVs a safer investment, financially and otherwise. Improvements in the quality and safety standards of battery technologies will significantly increase the general confidence of the buyers and financiers in the segment. Extended warranties by the manufacturers can also help allay the fears around technological performance and hazards.
India’s EV revolution needs innovative forms of vehicle ownership and financing that go beyond traditional auto loans and caters to evolving trends in mobility. Vehicle leasing, battery subscriptions, and pay-as-you-go models are just some examples that may help ignite this segment while it still deals with higher costs.
Who should care?
- Financial institutions – banks, NBFCs, etc.
- Potential EV buyers
- RBI, 2022, “Sectoral Deployment of Bank Credit – May 2022,” https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=53942
- KPMG, 2020, “Shifting Gears: The Evolving Electric Vehicle Landscape in India,” https://assets.kpmg/content/dam/kpmg/in/pdf/2020/10/electric-vehicle-mobility-ev-adoption.pdf