Startups propel EV financing as retail credit remains constrained

Bengaluru: Electric vehicle adoption in India is growing by the month according to recent sales figures but a lack of liquidity in the market for this nascent industry is causing roadblocks in larger accessibility. EVs are already higher priced than internal combustion engine (ICE) vehicles due to non-localisation of the battery supply chains, which make up for almost half of an EV’s cost. Added to that mix is the absence of a resale market and limited understanding of the technology, leading to banks and non-banking financial companies (NBFC) steering clear of the sector or charging higher interest rates. In the absence of traditional lenders, a market for EV financing startups is forming, faced with its own unique challenges.

As per a recent NITI Aayog report, the interest on auto loans charged by auto makers on electric two-wheelers (2W), which have seen the highest uptick in adoption, ranged from 12.2-21%, which is significantly higher than the rates charged for ICE 2W, which is between 8.85-17.8%, an average difference of 1.4%. As per experts in the sector, the reluctance and higher lending rates are due to several perceived risks of both borrowers and the asset.

“A vehicle not performing within its perceived life cycle (with battery life impacting performance) makes it difficult for banks to service the loan, as the risk of non payment increases, especially in the case of B2B use, where the life of the vehicle has a significant impact on how your profit and loss structures work. Also, in the event of a default, their ability to repossess and re-deploy from a value perspective comes down if the vehicle is not meeting the criteria of what it should originally be,” Sandeep Divakaran, chief executive officer, of EV financing firm Greaves Finance Ltd pointed out.

The reluctance of banks has led to private financers in the startup space taking charge to fulfil the needs of aspiring EV-owners, many of whom are tying up with manufacturers and NBFCs to extend credit where banks wouldn’t. A number of them are using tech-enabled tools to not just provide personalised loans, but also add features such as guaranteed buybacks, discount on insurance, and cheaper upgrades to newer models and features, among other attractive benefits.

Many of these financiers receive investments from companies overseas that are looking to earn carbon credits and help their ESG scores.

“The credit inflow for such efforts is getting traction globally because your entire business model revolves around impact investment and climate change. That attracts a lot of foreign investors and a lot of these larger funds and global companies are very interested in looking at this market,” said Nehal Gupta, director at EV financing provider AMU Leasing and EMFAI (Electric Mobility Financiers Association of India).

Even then, commercial fleet operators are getting a larger slice of this cake, due to their pre-existing tie ups with lenders and lower total cost of ownership and residual value risk.

"The market for commercial fleets is more near term in nature and the fastest to transition to electric. It's largely because of the total cost of ownership being far superior. Because, when you are travelling longer distances, which in the case of fleets will be 80-150 kilometres per day, versus passenger vehicles is about 20 to 40 kilometres per day, you will see that the economics of fuel costs versus charging makes a lot more sense because capex cost of vehicles varies,” said Dev Arora, co-founder and chief executive officer of EV leasing platform of Alt Mobility.

Comparatively, the growth in the retail sector has remained constrained due to the factors mentioned earlier and the high costs not being offset by higher usage unlike commercial vehicles. According to experts, policy changes would be required to accelerate financing such as including EVs under priority sector lending, which would increase capital availability and reduce interest rates, according to Divankar.

In the absence of that, banks are unlikely to step into the sector till the growth opportunity is clear as it currently represents only a small fraction of the larger automobile lending business, which is perceived to carry much lower underwriting risk. While experts believe smaller entities will eventually be eaten up in the longer run, they will have to show a discernible business model, for which technology is expected to be heavily leveraged.

“Innovations like blockchain, AI and machine learning will help financing companies streamline operations, enhance customer experiences, and enable more personalised financial services. There'll be greater use of data analytics for risk assessment and for personalising product offerings, which will lead to more efficient customer centric services,” according to Sandiip Bhammer, managing partner of climate-focused VC fund Green Frontier Capital.