Nehal Gupta – Founder at AMU Leasing Pvt Ltd (an EV ecosystem exclusive NBFC), presents a brief on the current EV financing situation in India, lending types and models, challenges and solutions, and the role of the Government in easing the financial management for potential consumers.
Primary lenders in India’s EV financing space
There are two primary lenders for the EV segment in India – Banks and Non-Banking Financial Companies (NBFCs). Both banks and NBFCs can be categorised in the space of FinTech or Co-lending.
In the banking sector, the State Bank of India (SBI) is a key participant in this market with its ‘Green Car Loan.’ Banks like HDFC have declared ambitions to enter the EV finance industry in the near future, while other major brands like Yes Bank and Axis Bank have partnered with car manufacturers to give reasonable EV EMIs. Banks encourage high credit age customers with an increased supply of credit to opt for bank financing.
But the challenge is the lower flexible lending and collections options available. So, to provide more flexible repayment options for the public, NBFCs play a vital role.
In India, NBFCs in the EV finance industry use either a captive or non-captive strategy. Captive NBFCs usually cooperate with automobile manufacturers to offer reasonable finance to their customers in an exclusive manner. Non-captive NBFCs, on the other hand, focus on financing particular car or vehicle sectors.
Data research shows that NBFCs’ market share in auto finance has increased over the last 5 years. NBFCs accounted for 43% of the formal car lending industry in 2016. By 2020, NBFCs had surpassed banks to account for 52% of the market. Furthermore, NBFCs have a larger risk appetite and often provide smaller pools of money, often in non-metropolitan areas. New fintech-based NBFCs have begun to expand EV adoption in tier 2 and tier 3 cities as well.
EV customer profiles
We can broadly divide the EV customer profiles into enterprise and retail customers.
For a retail customer, the transaction cycle is quite simple. The lender funds the dealer or the super-stockist with the required cash flow in exchange of the asset between the dealer and the customer, and the latter is responsible for repayments to the lender.
But in the case of an enterprise customer, the transaction cycle can get a bit more complex due to the additional stakeholders involved. Enterprises prefer an ‘asset-light’ approach in tandem with operating lease models. It requires intermediary stakeholders like fleet operators and aggregators to further engage in contractual agreements with larger e-commerce and FMCG companies to sublease the vehicles along with drivers through DCO (Driver Cum Ownership) financing.
For a deeper understanding of both customer profiles, let’s look at the fundamental characteristics.
- Newly or heavily funded start-ups/Legacy MNCs
- Better creditworthiness and provide enough security net to lenders
- Covering urban and semi-urban markets
- Technology creators and curators
- Deep understanding and awareness which is simplified for end users
- Use EV for primary revenue generation of INR 15000-25000 monthly
- Moderate awareness about EVs and their benefits
- Low to credit age or no credit history, not part of the formal credit system
- Lack of digital money penetration, cash-heavy mindset
- Despite smartphone adaptability, lack of new tech learning
Challenges in the EV financing space
There are a few challenges in the EV financing domain, and due to a comparatively newer market, the correct product-market fit is still evolving. For instance, retail lending to assist individuals and institutions in financing EVs has displayed sluggish market behaviour due to shrinking component supplies and a lack of customer awareness. Due to the risks connected with EVs, financial institutions (FIs) such as banks are not lending to them hassle-free. These challenges can be broken down into three major categories:
OEM and Technology Challenge
For decades, OEMs have found the automobile captive financing sector to be both reliable and profitable. However, the existing quo is being challenged today by the future of mobility, regulatory reforms, financial digitisation, and other challenges.
Despite many lucrative policies such as FAME-II and various other state government schemes, awareness among the general public is lacking. An article published by the Times of India states that only 10% of the initial outlay of 8,596 crores was spent before FAME-II was extended. So, the proper execution and awareness of these policies must be taken care of. Furthermore, due to heavy subsidies, the gross margin models for many OEMs are hedged with risky bets.
Unlike ICE vehicles, reselling is a huge concern for electric vehicles. The battery warranty period, lack of trust in a used vehicle, and lack of proper systems create hesitation for the customers to purchase a second-hand electric vehicle in India.
The good part is that there can be a solution for each problem if all stakeholders work as a team. The proposed solutions for the above-stated challenges can be:
- Industry-led buybacks
- Creating a secondary EV market for resale
- OEM should agree to risk-sharing mechanisms either through subventions or co-lending
In bringing these solutions to life, the Government of India will play a significant role in areas such as:
- Risk-sharing mechanisms like co-lending through asset finance programs with public and private sectors
- FLDG with larger and international banks, which banks and NBFCs can access in defaulted or delayed payments
- Creating a sub-target for EVs will provide incentive and business clarity to banks
- Interest rate-free loans for large empanelled OEMs with high product quality
- Seed funds to FIs and tax credits and rebates
- Credit access will overall help enhance liquidity and money flow for EVs
Hopefully, with the combined efforts from the Government, financial institutions, manufacturers, and emerging consumer support, we will be able to improve the financial stability of the EV market. We hope to empower more retail and enterprise customers to benefit from various financing and leasing options to achieve fair financial inclusion for all stakeholders.
AMU Leasing Pvt. Ltd. has the vision to finance 1 million EV stakeholders by 2026, and we aim to become a pioneer financial solution provider for the EV ecosystem.
This article was originally published in EVReporter August 2022 Magazine which can be accessed here.
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