As electric vehicles in India gain traction and find a place for themselves in the four and two-wheeler markets, there arises a need to make them a part of the mainstream.
India’s transition to electric vehicles has advanced rapidly in the past few years. In order to create a conducive environment for large-scale EV adoption in the country, there are a variety of factors that need to work in tandem with one another.
The country’s EV utopia is taking shape gradually, thanks to demand creation, the state’s EV policies, and domestic manufacturing, amongst other factors playing an integral role in EV adoption. This trend is further being expedited by policy, compelling economics, and improved business opportunities for players to come in.
However, when it comes to the barriers to the EV sector in India, there does lie a few. One of them is financing electric vehicles. The Indian consumer has historically been dependent on third-party financing when it comes to the automobile sector.
So, naturally, when it comes to EVs, which demand a premium over regular ICE vehicles, financing capabilities and services need to be at the forefront.
Let us look at the current EV financing scenario in and around the country.
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Why Does India Need To Streamline EV Financing?
Ensuring financial options for acquiring electric vehicles is one of the barriers to EV adoption across the country, which requires large-scale and multistakeholder involvement.
High financing costs and the long-term economic value of EVs are some real-world problems that many Indian customers are currently wary of.
The perceived nascency and ‘still-getting-there’ notion around electric vehicles may lead to higher interest rates.
However, at the moment several banks are offering Green Loans or car loans, especially for electric vehicles to customers. The State Bank of India’s Green Loan offers its customers a chance to finance their EVs, with interest rates ranging between 7.95% to 8.30%.
While that happens, there arises a need to organize the EV financing sector at a faster pace than at which the adoption of EVs takes place around the country, in order to avoid unorganized financing and lending operations.
Roadblocks to EV Financing
Many of the roadblocks and barriers to an efficient EV financing model in the country narrow down to a single factor, i.e. the nascent stage at which the EV industry is currently operating at.
However, apart from that, there are underlying causes that lead to the EV financing scenario becoming a difficult thing to achieve. Identifying these solutions becomes imperative before mapping out solutions and getting the right answers to questions about EV financing in the country.
Higher vehicle costs: Most electric vehicles, at the moment, tend to be priced higher than their traditional counterparts. The higher upfront cost makes it less favorable for financers and other institutions to finance.
Uncertainty of resale value: One of the real-world aspects that make customers and financers rethink their decision to incline toward an EV is the uncertainty regarding the resale value of these vehicles in the secondary market.
Probability of default: India’s EV story is being led by electric two and three-wheeler vehicles. Many of these include electric rickshaws used for last-mile connectivity. This segment has largely remained unregulated and unorganized, with no formal income proof and improper credit history. The lack of formal records leads to a larger perception of risk amongst financing bodies. This, in turn, increases the costs and further hinders the process of purchasing an EV.
Still Evolving Technology: The financers and major stakeholders are closely observing the EV industry. This has led them to take note of certain things and every development taking place in the EV space. Although, as EVs develop and awareness around these gets better, there might be more entrants taking advantage of the new landscape.
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Who Are The Major Players in EV Financing in India?
When it comes to determining the right players in EV financing in India in 2023, there are two distinct names that pop up. As of now, the two major lenders for EV financing have been Banks and Non-banking financial companies (NBFCs).
The banking sector is filled with the largest banks in India, offering special incentives for customers planning to go for an EV. The biggest participant in the space is the State Bank of India (SBI) offering green loans to buyers of electric vehicles. Other banks have planned or are mulling to partner with EV manufacturers to offer attractive EMI options to customers.
On the other hand, NBFCs are planning to fill the gap of flexibility in lending and collection options available. These companies primarily offer two types of financial models, i.e. captive and non-captive models. Captive finance models offer work with manufacturers and/or dealers to offer reasonable finance options to their customers. Non-captive finance involves companies working with specific vehicle segments and sectors.
The Solutions
Gaining sure-shot ways and figuring out a fixed set of ways to start sorting things out, might not be the way to go when it comes to improving the EV financing infrastructure in the country.
However, one way to look at it is by understanding the way other countries have looked at it and found ways to come up with solutions. Moreover, knowing the current stakeholders in the EV industry and their respective roles.
This allows us to look at probable, if not only solutions to EV financing in the country.
Interest Rate Subvention: An interest rate subvention allows loans to get affordable for the final consumer. Subvention works like a subsidy on the existing interest rates, and the government bears the remainder of the interest via associated banks. Interest rate subvention has been popularly used as a subsidy measure in agriculture education and handloom industries amongst others. One of the nearest examples of interest rate subvention would be the EV policy by the Delhi government. However, subvention alone cannot be the tool to expedite the financing process. Combining it with other supporting instruments is the key.
Product Guarantees & Warranties: Product guarantees and warranties can be an excellent tool to ensure accountability amongst OEMs, customers and retailers too. Guarantees enable OEMs to ensure that their produced equipment is top-notch and performs effectively. Whereas, product warranties to the buyers, on the other hand, lead to better vehicle quality and keep the costs and risks associated with it at a lower end. Carmakers such as Tata and Hyundai offer warranties on their EV models that they offer.
Risk Sharing Mechanism: Risk-sharing mechanisms between governments and other entities can help expedite the overall financing scenario around the country. This can be done by creating guarantees or facilities that cover loan repayment risk. This allows financial institutions to create trust in technology, manufacturers, and business models. It can also help in reducing customer risk. Organizations such as development banks can take up risk-sharing mechanisms and implement them on behalf of the state or central government.
Secondary Market Development: In order to address one of the concerns around EV financing, i.e. the resale value, developing secondary markets can be the way to go. It isn’t just about setting up a secondary market but formalizing it further. OEMs and carmakers can introduce buyback programs, loyalty bonuses, and repossession guarantees among other things to develop a secondary market.
One of the primary and capital-intensive components of an EV is the battery. Programs for repurposing batteries and developing a secondary market for batteries can add to a changed perception around EVs and further extend their utility.
Conclusion: Relying on Financing to Make EVs Mainstream
As of 2022, India is the 4th largest car market in the world.
The country has come a long way when it comes to creating and sustaining an automotive industry from scratch. For the next stage of automotive development, electric vehicles will be at the forefront. In order to keep the industry’s competitiveness intact, it is necessary to work towards bringing EVs into the mainstream.
The transition to electric mobility wouldn’t come easy, that’s for sure. But, the benefits it brings with itself are certainly worth pondering over.
Benefits such as reduced costs per passenger kilometer, job creation with a higher degree of localization, and deeper penetration along with health benefits thanks to reduced air pollution come in handy.