The Reserve Bank of India is considering a proposal from the Niti Aayog to categorise loans to purchase electric vehicles under the priority sector lending (PSL) segment.
If the proposal is accepted, it will help the segment get credit at lower interest rates. Currently, these loans are given under the auto retail category, but lenders are wary about financing purchase of electric vehicles (EVs) as they are unsure about the risks in a segment which is still in a nascent stage.
Niti Aayog chief executive Amitabh Kant confirmed that the government’s policy think tank has given the proposal.
Extensive Deliberations Ahead
It considered the potential of EVs in reducing emission of greenhouse gases and helping India in its fight against climate change, said the Niti Aayog CEO.
“The inclusion of EVs under PSL would not only reduce cost of finance but also provide finance to more people, thus increasing penetration of EVs in India,” Kant told ET. “Our view is that there is a case for this in the context of the impending climate change crisis and India’s recent commitments at COP26 in Glasgow.”
At the Glasgow Climate Change Conference last month, India has set itself a target of lowering the total projected carbon emissions by 1 billion tonnes till 2030, reducing the carbon intensity of the economy by less than 45% and cutting emissions to net zero by 2070.
The process for inclusion of EVs under PSL requires extensive deliberations and consultations to have a targeted outcome of increased access and reduced cost of finance to this sector, Kant said.
Manufacturers of electric two- and three-wheelers have also made representations to the banking regulator for PSL status, people in the know said.
RBI did not respond to ET’s email seeking comment.
Under the PSL framework, 40% of lenders’ total credit must be compulsorily loaned to specific sectors. These sectors include agriculture, small businesses, export credit, education, housing, social infrastructure and renewable energy. PSL is used by the banking regulator to direct financing to credit-starved sectors.
“Even as sales of electric vehicles are witnessing a surge, with the first half of 2021 already surpassing the 2020 numbers, EV financing continues to be the ‘weak link’ to this growth story,” said Sulajja Firodia Motwani, chief executive of electric two- and three-wheeler maker Kinetic Green Energy & Power Solutions. “Currently, very few banks and financiers are financing EVs and that too, at very high interest rates.”
In the first half of the current fiscal, EV sales more than tripled to 118,000 units, even as a shortage of semiconductors forced automakers to cut down on production of vehicles running on fossil fuels, hurting their sales.
Industry insiders attribute the increase in EV sales to both demand- and supply-side factors. Outreach by manufacturers, improved charging infrastructure, price parity with conventional vehicles due to federal incentives and falling battery prices are driving sales. The hinterlands too are seeing faster adoption amid a rise in the price of diesel and petrol, with consumers increasingly choosing cleaner and greener mobility.
Hiccups in Financing
Despite the growth in sales, problems remain. Currently, electric vehicles, including two- and three-wheelers, do not have a robust resale market, which makes it difficult for banks to ascertain their residual value. This has led to higher cost of financing for EVs compared with other vehicles.
As a result, despite the euphoria, banks have been slow in financing the purchase of EVs.
“Some banks have had bitter experiences with financing the earlier version of e-rickshaws, which were powered by lead-acid batteries and were not good-quality products. The financial institutions had to bear losses in cases of default, as their residual value was low,” said Kant.
Even as banks are taking a wait-and-watch approach, non-bank lenders are cautiously entering the market.
“There are still many unknowns as technology, infrastructure and total cost of ownership evolve, and the relative give-gets of financing clarify. We are taking the view that it is wise to take measured steps with a view to learning the dynamics,” said Rajiv Lochan, managing director at Sundaram Finance, one of the top NBFCs in vehicle financing.
For lenders, until the technical aspects around battery (technology, shelf life, cost, mode of operations, et al) are clarified and the implications on residual value of the asset are clear, assessing inherent risks will be tough, and financing could remain constrained.
“The government needs to extend support from the Centre through lower rates of interest for the EV technology to proliferate,” said Hemal Thakkar, director at rating and research firm Crisil Research. “Banks are aware of the cost economics, but there is no guarantee on resale value of such vehicles yet. The technology needs to stabilise, and financiers need to get comfortable on its commercial viability.”
To improve financing for EVs, Niti Aayog is working with the World Bank to set up a $300-million ‘first loss risk sharing instrument.’ State Bank of India is the programme manager for this facility, under which total financing is expected to be around $1.5 billion.
Also, private lender Axis Bank and Private Infrastructure Development Group guarantee arm, GuarantCo, recently announced a partnership to execute an umbrella guarantee framework of $200 million towards accelerating the e-mobility ecosystem in India.