Financing and increasing the EV adoption in India!

Source : Wikimedia Commons https://commons.wikimedia.org/wiki/File:Electric_Car_recharging.jpg

India has signaled that its automotive future is electric, and the government has started taking a gamut of policy steps towards the adoption of EV. Apart from the government support, the other push factors for EV adoption have been to meet the climate goals, increase in battery manufacturing, positive change in consumer behavior and growth in financing options for EV in the Indian market.

As per India Energy Storage Alliance (IESA), the Indian EV market will grow at 49% CAGR in the 2022–2030 in a business-as-usual scenario. NITI Aayog projects that between 2020–2030 the estimated cumulative cost of the country’s EV transition in INR 19.7 Lakh crore and the projected annual loan market for EVs would be INR 3.7 Lakh crore in 2030. Despite of these projections and policy push from the government, the EV adoption in Indian market has been slower than expected and at a nascent level. The Indian banks and NBFCs are still apprehensive to lend for EVs due to following asset and business model risks –

1. Banks are unable to ascertain the resale value of EVs in case of a loan default or delays in repayment. Also, they face perceived risks related to the product quality of EVs in market. In recent times, there have been many battery-related accidents in the news. Hence, there is Low Loan-to-value ratio for financial institutions as buyers are made to pay 25–50% of value for down payment.

2. Shorter Loan Tenures & higher interest rates for EVs compared to Loans for Internal Combustion Engine (ICE) vehicles.

3. Both financial institutions (FI) and customers are faced with lack of information related to the EVs. Though limited, finance is available, but credit terms are not meeting the buyer expectations. Specialized finance options are limited.

Apart from the Finance, the EV adoption in India also faces the following major challenges –

1. Insufficient charging infrastructure — Lack of sufficient charging infrastructure has been one of the primary reasons for buyers who resist purchasing an EV.

2. High cost of manufacturing — For a market having high price elasticity, the Indian customers often refrain from purchasing EVs over ICE cars, especially in the low-end car segment. Also, the higher cost of Lithium battery and technology used in EV is a matter of concern.

3. Limited choices in EV — The EV market is still emerging, and buyers are not having a wide range of options in EV cars unlike the ICE cars. It is still a seller’s market, and more competitiveness and investment will help in creating the buying demand.

4. Import dependency of raw material — Vital materials like Lithium, Nickel, Cobalt, battery grade graphite and rare earth minerals, among others are not readily available in India and hence are usually imported. This again adds to the higher fixed cost of EV.

5. Deficiency of supporting infrastructure — India is currently deficient in the production of supporting electronics components necessary for manufacturing EVs like battery, semiconductors, and controllers, among others.

6. Electricity grid challenges — Once EVs become mainstream, the higher demand for power will also affect the price of charging an EV. This huge EV energy requirements cannot be supported by the existing capacity of electricity distribution grids.

Both central and state governments are experimenting with a gamut of EV policies to address these financial, logistical, and manufacturing challenges. Some of the major policy efforts are –

1. National Electric Mobility Mission Plan (NEMMP) 2020 — Launched by Dept. of Heavy Industries in 2013 with a target to achieve 6–7 million sales of hybrid and electric vehicles from 2020 onwards.

2. Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) Scheme — Launched in 2017 to support market development and manufacturing ecosystem of hybrid and electric vehicles with focus areas like technology development, Demand creation, pilot projects and charging infrastructure.

3. Bureau of Industry Standards (BIS) and other industry research bodies have created design and manufacturing standards for EVs to smoothen their in-house production

4. Ministry of Power has issued Guidelines & Standards for charging Infrastructure for EVs to enable their faster adoption

5. Ministry of Road Transport & Highways have announced ‘Green License’ plates and exemption from the commercial permit requirement for EVs

6. NITI Aayog’s National Mission on Transformative Mobility and Battery Storage aims to create a Phased Manufacturing Program for five years till 2024 and set up large manufacturing giga plants in India.

With the above policies, Government of India has made steep commitments for the creation of EV demand, its domestic production, and eventual EV adoption. As per NITI Aayog, India’s EV sales penetration has the potential to reach 70% of total automobiles by 2030. To meet these objectives, a holistic and multi-stakeholder collaboration is must. Also, innovative solutions are needed to access low-cost EV financing at a huge scale. Therefore, Financial institutions, government bodies, industry bodies and consumer rights forums must work together to adopt and implement these innovative solutions. NITI Aayog has identified the following solutions for FIs, industry and the government bodies to enhance and mobilize financing for EV transition in India –

1. Priority sector lending (PSL) — Inclusion of EVs in PSL would incentivize banks to increase lending in the sector.

2. Schemes like interest rate subvention could make the EV loans more affordable.

3. More R&D efforts and strong design standards by manufacturers can help in reducing the uncertainty associated with EVs. Owing to which companies would be able to offer better product guarantees and warranty terms

4. Risk-sharing mechanisms between FIs, international funds and government to cover losses associated with EV loans. This would allow FIs to take more risk and build trust among the customers.

5. Ecosystem players like large fleet-operators and last-mile delivery companies can tie-up with banks and provide partial guarantees and loan availability to driver partners.

6. Industry and government bodies need to setup a buyback program with the help of manufacturers to improve residual value for EVs akin to the secondary market for ICE cars.

7. Segments like fleet aggregators, last mile operators and ride-hailing services, among others need to be targeted for EV electrification to build trust in the ecosystem.

8. Government regulators and industry bodies must create an open data repository for EVs. This would address the data challenges faced by FIs for EV specifications, drive cycles, charging costs, operational parameters, expenditures, and losses due to failures, among other data to build risk frameworks, ascertain optimum interest rates and to design better loan products.

The EV future for India seems ambitious and bright. Considering the socioeconomic potential and livelihood opportunities it can generate, large scale policy reforms, innovative credit products and prudent utilization of funds by multiple stakeholders is the need of the hour.

References -

1. https://economictimes.indiatimes.com/industry/banking/finance/test-drive-over-hdfc-bank-plans-to-go-big-on-ev-loans/articleshow/95670195.cms
2. https://economictimes.indiatimes.com/tech/startups/global-funds-in-drivers-seat-ev-financing-cos-charge-full-steam-ahead/articleshow/94729647.cms
3. ‘Mobilzing Finance for EVs in India’, NITI Aayog (2021)
4. https://timesofindia.indiatimes.com/business/india-business/ev30-how-adequate-finances-infrastructure-can-provide-fillip-to-indias-ev-dreams/articleshow/91465087.cms
5. https://www.pib.gov.in/PressReleasePage.aspx?PRID=1791477
6. https://powermin.gov.in/sites/default/files/webform/notices/Final_Consolidated_EVCI_Guidelines_January_2022_with_ANNEXURES.pdf
7. https://e-amrit.niti.gov.in/home