An estimated Rs 45,000-55,000 crore will be required to finance EV purchases by 2026 in the country

India’s initial success with electric vehicles, mainly two-and-three wheelers, has shown that there’s a perceptible acceptance for EVs among buyers. While average consumers are driven more by the cost-to-return ratio of the product, they also are aware and conscious of their carbon footprints and thus have begun weighing the damage to the environment before buying the vehicle that runs on traditional fossil fuels.

A study this year showed that Indians were open to paying a premium for their next vehicle (cars) and most of them look to buy in the range of Rs 10-15 lakh, despite high inflation eating into their savings. This finding should not be surprising given the rising middle class, many of whom aspire to get a vehicle for the first time. This class usually depends on financing support for vehicle purchases and value-for-investment is a significant factor for them.

While they get easy access to financing options for buying traditional vehicles, they face some challenges when buying EVs. Some policy measures have been taken to address the challenges such as giving incentives through Fame scheme, lower GST, creating charging infrastructure and promotion of local manufacturing via PLI schemes. While these measures promise to help in bringing the overall cost of ownership of EVs at par with ICE vehicles, the absence of a holistic EV financing ecosystem acts as a significant hurdle to large-scale adoption of electric vehicles.

A new study by the Niti Aayog estimates around Rs 45,000-55,000 crore will be required to finance EV purchases by 2026 in the country. In order to truly harness this potential, it is necessary to address the financing challenges in the ecosystem and unlock the capital required to drive India’s green mobility shift.

From a consumer’s perspective, the study says, the financing options available are limited as fewer banks and NBFCs lend for EVs vs ICE. Those that lend offer unfavourable terms – higher down payment and EMI burden because of 1-9% higher interest rate and 6-18 months shorter tenor. A major hurdle financiers face in offering competitive loan options is the real and perceived risks associated with the nascency of the EV industry and related technology.

Fig 1: The first car for an individual is always a prized possession. Image via: CreditMantri.

As India, one of the top five markets for automobiles, has already made a strong commitment towards driving EV adoption in the country, it is imperative to ensure access to affordable financing to EV buyers if we are to become a leader in green mobility transition.

Why these challenges?

The EV industry is new and thus has to overcome the routine risks associated with a new industry. There is a degree of scepticism both on the consumer side and the lender side on the durability of the product.

The battery life of an EV is limited and they need to be replaced periodically.

Buyers have to consider the added recurring capital expenditure of battery replacement every 4-5 years with low financing options. Besides, the resale value of the battery is not yet defined as a recycling market is yet-to-be established. The resale value of a vehicle without the battery is also unknown.

What needs to be done? 

A comprehensive plan needs to be chalked out to address the financing-related challenges the EV ecosystem is facing today. The Niti Aayog study outlines some of the steps to be taken as follows:

  • Establish low-cost funds with risk sharing mechanisms: Access to low-cost capital can be facilitated through the creation of a risk-sharing facility that can cover general default or loss due to specific risks – for instance, product failure. The government can create this reserve fund and include multiple stakeholders.
  • Include commercial EV loans under priority sector lending: This policy to support specific EV segments will help in increasing financing options for the end customer and reduce the cost of borrowing with entry of banks in the segment.
  • Decoupling of battery and vehicle: This may allow the financiers to factor risks for vehicle and battery separately and create standalone lending options for vehicle without battery and the battery itself. This reduces the loan amount on the vehicle (hence reducing down payment & EMIs).
  • Subvention schemes and tax exemptions: Subvention schemes can be designed to offset a portion of the customer’s interest burden by enabling other players in the ecosystem to absorb a part of the interest burden. The government can also look at extending income tax benefits provided to individual owners under Section 80EEB for loans sanctioned beyond FY23.
  • Establish battery safety standards and performance certification framework: Since batteries can comprise 30-40% of the total vehicle cost, battery life and degradation are a major concern for financiers. A certification mechanism will boost financier confidence on battery performance and traceability. Also, develop a secondary-market ecosystem.

The India EV market size is expected to grow from $5.61 billion in 2023 to $ 37.68 billion by 2028, at a CAGR of 46.38%. The overall EV volumes are expected to touch 30-35 lakh units by 2026 (excluding e-rickshaws). The two-wheeler segment is expected to be the primary driver with 13-15% adoption, followed by 3W and 4W segments with 18-20% and 3-5% adoption respectively.

There is no doubt that the developing EV ecosystem is complex and it will take some time to fully evolve, which makes it more crucial to address barriers in financing so that more buyers are attracted to this new segment. This requires the government, financial institutions, OEMs and various industry players to collaborate to realise the 2030 target of EV sales penetration of 30 per cent for private cars