Given the remarkable growth of India’s automobile industry, EV financing is a growing financial service tailored to unique characteristics
India’s automotive sector, particularly the EV segment, is at a pivotal moment. The country’s automotive industry is on a remarkable growth trajectory, with estimates pegging it at $300 billion by 2026. Consistent policy support, focus on infrastructure development and growing consumer appetite have helped in making India emerge as the third-largest automotive market globally in terms of domestic sales.
To effectively manage the growing menace of air pollution as well as emissions and foster a sustainable transportation ecosystem, the government's focus on promoting electric mobility remains central. India has already set an objective of achieving 30% EV penetration by 2030 and is at a crucial juncture.
Currently, the total vehicle loan AUM stands at $150 Bn. “Vehicle loans are NBFCs' second-largest segment, with an AUM of $80 Bn in 2024 with expected growth rate of 15-16%,” said a recent report titled “Financing EV Revolution – Exploring Today’s Landscape and Tomorrow’s Opportunities”. It concluded that greater availability of credit and financing options, rising income and consumption and “high activity levels in infrastructure and transportation” are driving the present demand.
According to the report, 1.67 mn electric vehicles were sold in FY 2023-24, with an EV penetration rate of 7% in FY 2024. However, when it comes to financing EVs, a distinct set of challenges, that include higher upfront costs and uncertain residual values, remain critical. While the government’s ambitious electrification targets are pushing the industry forward, financing challenges continue to hamper mass adoption.
Fig 1: Electric Vehicle(EV) charging units are seen at a parking lot of Sobha city, a real estate property, in Gurugram, India, October 27, 2023. REUTERS/Anushree Fadnavis/File Photo
Electric Vehicle Financing Ecosystem In India: Challenges and Opportunities
Vehicle financing is a major pillar supporting the growth of India’s automotive sector. The segment of financing electric vehicles is a “growing financial service” which has its own unique set of characteristics. Electric vehicles generally have a higher upfront cost in comparison to their Internal Combustion Engine (ICE) counterparts but their TCO is significantly lower. This adds a new dimension into the financing ecosystem.
“By 2030, the annual EV finance market is projected to reach $50 Bn (INR 3.7 lakh crore). Innovative financial solutions are needed to mitigate challenges for both customers and financiers,” the report said, adding that this road too remains riddled with several challenges.
The report points towards some key issues in financing EVs, primary among them being the higher initial down payment, with “10-30% lower Loan to value for EV vs ICE”. Another crucial hurdle is the higher EMI burden and interest rates, with a “tenor 6-18 months shorter and Interest rate 1-7% higher”. The report also points out the challenge of recurring capital expenditure like battery replacement costs after a few years.
There are several other bottlenecks that both consumers and financial institutions have to go through. One of them is the unpredictability of the resale value of the vehicle owing to sometimes no or limited understanding of asset decay curve and intrinsic value. “Understanding increased customer risk due to increased EMIs and life of asset including battery, absence of information on usage, state of health (SOH) of battery, unclear standards for batteries, fast changing technology innovation curve coupled with financiers' limited knowledge on performance, absence of historic data on performance under various usage conditions and risk of product failure,” were among the pain points listed out in the report.
However, it also advocates several innovative models that are available and can be leveraged to drive EV affordability and ultimately adoption. One of them is the subscription-based model – a recurring fee system for EV use that offers flexibility to shift vehicles from time to time or even end the subscription. Another way is undertaking the “Lease model that reduces upfront cost and maintenance. In operating lease, the company retains the residual value,” the report said.
Another model that the report talks about is that of peer-to-peer lending, which entails borrowing from individual investors instead of banks, “providing competitive rates and flexible terms.” A lease-to-own model entails a hybrid model where customers lease EVs for a set period with a mandatory purchase at the end.
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