Electric Vehicle financing: The Next Billion-Dollar Opportunity

The growth of the automotive industry is at its peak. With growing urbanization in India, the sustainability of the transportation system is among the major concerns. The industry has entered into a new age of innovation with the introduction of electric vehicles. These green vehicles are comparatively less harmful than conventional vehicles that run on gasoline or diesel. Green-tech has enabled automotive manufacturers to experiment with their best in producing more fuel-efficient, environment-friendly and reliable automobiles. Their less dependence on gasoline has made them a prior choice for Earth-friendly people.

Although the Central and respective State governments in India are promoting and incentivizing customers to switch to Electric Vehicles, the transition towards EV adoption has been slow and cautious. Customers are hesitant to make the switch due to uncertainty of battery life, range per hour, charging time, charging networks, the resale value of the vehicle, and last but not least limited financing options. FAME, or Faster Adoption and Manufacturing of (Hybrid and) Electric vehicles, is currently India’s flagship scheme for promoting electric mobility. Currently, in its 2nd phase of implementation, FAME-II is being implemented for 3 years, eff. 1st April 2019 with a budget allocation of 10,000 Cr.

The incentives offered in the schemes are:

EV Industry in India:

In 2021, 329190 EVs were sold in India, which accounted for approximately 1.3% of total vehicle sales in 2020-21. Currently, the Indian EV market is valued at USD 14.34 billion; expected to cross USD 153.97 billion by 2027 at a CAGR of 47.09 % (2022-27). But, there are very few fintech and NBFCs that offer financial services to consumers. However, the large-scale potential for growth and transformation of the automotive industry can only be achieved when all the stakeholders in the ecosystem from venture capitalists, private equity firms, NBFCs, and commercial banks start rowing in the same direction.

Investments By Big Players

Recently, TPG Capital Management announced that it would invest ₹7,500 crores in Tata Motors’ newly created electric vehicle (EV) subsidiary. This will be one of the largest private equity investments in the Indian automotive sector. Ather Energy has raised multiple rounds of funding from the likes of Sachin Bansal and Hero Motocorp. Ola electric, which is valued at USD 5 Billion, raised USD 200 million from Tekne Private Ventures, Alpine Opportunity Fund, and Edelweiss in their latest round of funding. However, most of the capital that has been raised in this sector has been channeled towards manufacturing and infrastructure building and less towards helping the customers make the expensive switch to electricity.

Present Financing Scenario

Currently, a handful of NBFCs are providing financing to buy electric vehicles but are charging interest rates ranging from 20%-36% per year. The reason for the lack of funding is that there are hundreds of manufacturers of electric vehicles in India and most of these manufacturers sell their products under their brand. Since these are not established brands, the actual selling price of these vehicles differs from the MRP that is listed. NBFC is having a tough time gauging the collateral value of these vehicles.

Moreover, since electric two-wheelers and three-wheelers (L3 segment) continue to drive EV volumes in India, most of the buyers are from the informal sector. These buyers are mainly first-time buyers who have little or no credit history so it is difficult to understand the financial credibility of the borrower. Consequently, upon default, the repossession and legal cost can outweigh the resale value of the underlying asset considering two-wheelers and three-wheelers make up over 90% of the EV sales in India.

Publicly listed banks always have the proverbial gun pointed at their heads by the investors to outperform their peers every quarter. This deters them from really fulfilling their promise of financial inclusion. This is where newer technologically advanced fin-techs can sidestep the landmines that come along with lending to this unbanked and unorganized sector. It presents an opportunity for the NBFCs and Fin-techs to become direct stakeholders in the growth of this green sector that is on the verge of going mainstream. The EV industry of the nation has the potential to churn the global market with the mutual support of government and private players.