The electric vehicle (EV) market in India is in the midst of a remarkable transformation, shaped by growing demand for cleaner and more sustainable transportation solutions. With an increasing focus on environmental consciousness, EVs are now leading the way towards a greener, eco-friendly future. According to the NITI Aayog Report 2023, presently, 50% of 2-wheelers, 90% of 3-wheelers and 80-90% of 4-wheelers are financed in India. Given the higher upfront cost of EVs, it is even more important to have low-cost financing solutions for them as an affordable substitute for Internal Combustion Engine (ICE) vehicles for the average Indian consumer. With the growing adoption of electric vehicles, the EV financing market is projected to reach INR 45 to 55 thousand crores by 2026, as stated in the same report. From a customer perspective, thus, there are limited financing options for EVs currently in India. In addition, the options available require a higher down payment because of a low LTV (loan-to-value ratio) and higher EMI due to high interest rates and shorter tenures. Hence, there is a need for more accessible and affordable EV financing solutions.
As this sector continues to grow, addressing these challenges becomes crucial. Non-Banking Financial Companies (NBFCs) are emerging as vital contributors to the increased adoption of EVs in India. The road to widespread EV adoption presents a fair share of challenges, and this is where NBFCs come into play as the driving force promising this paradigm change with more lucrative finance options. Although the demand for electric vehicles has been on the rise, ensuring a seamless last-mile mobility experience, especially in rural and semi-urban markets, presents a significant problem. NBFCs, while maintaining a pan-India presence, have been paving the way for India’s EV infrastructure to evolve.
Bank’s reluctance to finance electric vehicles (EVs):
Historically, banks have held a substantial role in vehicle financing. However, when it comes to electric vehicles, they frequently encounter limitations. The factors contributing to banks underperforming in EV finance are diverse.
Due to the limited uptake among consumers and a narrow range of available EV models, it’s quite evident that the Indian EV sector is still in its early stage of development. The gradually growing EV segment poses formidable challenges for banks when dealing with EV buyers. The most significant challenge currently faced by banks is accurately assessing both the resale value and the demand for EVs, two critical factors integral to the loan underwriting process.
The high upfront costs of EVs are primarily attributed to lithium-ion batteries and other imported parts. While the Indian government has introduced incentives and subsidies to promote EV adoption, these measures have yet to make EVs as affordable as traditional ICE vehicles. This situation makes banks hesitant to finance high-value EVs, as they aim to avoid longer loan tenures and larger loan amounts. Banks may also worry that customers might face difficulties in charging their vehicles due to inadequate infrastructure, potentially leading to repayment issues. There is also uncertainty about the future resale value of EVs, which further complicates banks’ efforts to predict the long-term value of EVs.
Due to these uncertainties, banks may offer shorter loan tenures for EVs and may have a slower loan approval process. This results in higher monthly payments and potentially limits the affordability of EVs for some customers. Banks could also adopt a more rigid approach to loan approvals and standardise the terms, which further restricts access to EV financing through banks.
NBFCs leading the EV financing:
In the past few years, NBFCs have become significant players in EV financing due to their adaptability, innovation, and in-depth understanding of the constantly evolving EV market. Their achievements can be attributed to numerous factors. NBFCs are typically more agile and can cater to the diverse requirements of loan borrowers, leaving traditional banks behind with standardised processes that may take longer.
More NBFCs than banks have partnered with EV manufacturers and dealers in recent years, offering comprehensive deals with lower interest rates and down payments to entice buyers to choose EVs over traditional vehicles. By reaching out to both urban and rural markets, NBFCs financing EVs are promoting green mobility. Their flexibility allows for tailored financial solutions that suit the unique needs of electric vehicle buyers and repayment choices. They benefit from collaborative lending, teaming up with traditional banks to offer loans at lower rates. This simplifies EV financing for consumers.
While NBFCs are making significant contributions to promote EV adoption in India, there is a compelling case for elevating electric vehicle lending to priority sector status. NITI Ayog’s FAME-2 scheme, launched in April 2019 with a budget of INR 10,000 crore to support 1.56 million EVs, focuses on demand incentives and capital subsidies for EV charging stations. Furthermore, reduced GST rates on EVs, the removal of GST cess, and proposed reductions on EV battery GST in the Draft Battery Swapping Policy are all favourable steps. Coupled with a Phased Manufacturing Program for EV components, this designation could provide specialised attention and incentives, further accelerating the shift toward electric mobility.
In a nutshell, India’s progress toward electric mobility is gaining momentum, with NBFCs leading the charge. As awareness of EVs increases and concerns about battery value and secondary markets are addressed, NBFCs are assuming pivotal roles in making electric vehicles accessible and affordable to a wider range of consumers. The synergistic relationship between the EV industry and NBFCs promises a brighter, cleaner, and more sustainable tomorrow for transportation. These financial institutions are not merely facilitating vehicle purchases; they are propelling change and catalysing a shift toward a greener future. The future is electric, thanks to the relentless efforts of NBFCs.
