Addressing The Challenge Of Demand-Supply Disparity For Loans In The Commercial EV Sector

Sameer Aggarwal Feb 27, 2021

While there is a major focus on electric vehicles across the world amid tougher emission standards, some countries are doing better than others when it comes to electric vehicle sales. In India, the most popular category of electric vehicles is three-wheelers as there are as many as two million of them plying on Indian roads. These are mostly low-speed e-rickshaws that come with a maximum speed of 25 km/h with sales of nearly 15,000 units a month. E-rickshaws are mostly powered by lead-acid batteries, which are inefficient and require regular replacement and maintenance tasks.

Newer variants of three-wheelers are entering the market, which includes electric cargo-loaders and L5 category vehicles which have a speed limit of 55 km/h with a high load-bearing capacity. There has been a rapid and deep penetration of electric three-wheelers in the northern states like Delhi, Rajasthan, UP, Bihar, and West Bengal. As new variants come into the market with better product design and quality and different battery technologies, are nation-wide adoption is imminent.

In a bid to accelerate the adoption of electric vehicles, several benefits have been offered by both the central and several state governments. These include subsidies on the purchase of vehicles, capital for infrastructure setup and interest subvention. There is generally no cap on electric commercial vehicle registration and registration costs are also waived in many states. Despite several benefits offered, the adoption of electric vehicles is not progressing at the expected pace. This is due to a huge shortage in the supply of credit and the cost at which credit is available.

With proper access to credit, the electric vehicle market can increase significantly with over 20 million vehicles on the roads in the next 5 years. This would help India establish its green credentials and also create a new industry, which India can dominate globally, especially since the focus in India is on lower-end vehicles, both two and three-wheelers that cost under $4,000. Several parts for these vehicles, especially electrical parts, are imported from China. As India achieves economies of scale, manufacturing of most components can also be done in India.

There are very few banks and NBFCs financing electric vehicles in an organized manner. Financing of individual vehicles, channel financing, and fleet financing are all limited. This impediment reduces the market to a fraction of its potential. In order to drive sales, dealers and OEMs have no choice but to fund vehicles themselves or provide loss guarantees to financiers to encourage them to finance. This means OEMs and dealers are now taking credit risks, which is not their core business. As such, OEMs and dealers are mired in the document collection, EMI collections, and vehicle repossession/resale.

To support this nascent and growing industry, the government (central and state) must focus attention on the supply of credit. This can be done through some very specific interventions and schemes explained below.

The first step is to create a fund specifically for financing electric vehicles. This fund can be disbursed through public sector banks to all banks, NBFCs, and fintech platforms that are operating in this space. This will ensure quick deployment of funds as public sector banks will not have to create new distribution and partnerships. The fund must be available at a low cost with a capping on the lending rate to the final customer. This will ensure that the benefit of the low cost of funds is passed to the borrowers. This fund must also come with some loss guarantees from the government. This will help banks protect their balance sheets and encourage them to lend.

The second measure will be to extend subsidies to all types of electric vehicles, including retrofit kits, vehicles sold without batteries, and vehicles with batteries other than lithium ion-based. This will broaden the reach of subsidies and give the end buyer several choices.

The third measure is to allow payment of subsidies directly to the loan accounts of borrowers. This will reduce their debt burden and clear loans quickly. This will promote financial prudence as the money from a subsidy is well utilized. This will also reduce risks for lenders (banks and NBFCs), which will encourage them to deepen their exposure in the segment.

India is on the threshold of an electric vehicle revolution. Small electric commercial vehicles used for intracity travel are very popular and can easily replace internal combustion-based vehicles in a few years. A little push from the government to make credit available will help India establish global leadership in this segment.