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Electric vehicles could help fight India’s pollution crisis – but the lack of bank loans is a hurdle

Winter in Delhi, like most parts of northern India, brings toxic air. Climatic conditions along with episodic events like crop burning and Diwali also worsen the air quality. As per the State of Global Air 2018 report, air pollution is a silent killer in India and the country lost about 11 lakh people due to it. But that is not all. Recent studies show that almost 27% of Covid-19 cases in East Asia are a result of long-term exposure to polluted air.

Combating toxic air requires action on multiple fronts and one such area is reducing vehicular emissions. Studies show that in a city like Delhi motor vehicles are the major source of pollutants emissions, contributing to about 40% of PM2.5 (ultrafine particles that are less than 2.5 microns in size and are responsible for health issues).

To address the issues of vehicular emission, states like Delhi are taking a holistic approach to promote electric vehicles. Launched in August, Delhi Government’s EV policy has an ambitious target of having a 25% share of battery electric vehicles in new vehicle registrations by 2024.

However, scaling up electric vehicles needs substantive work in terms of charging infrastructure development, EV model availability, public awareness, etc. In addition to this, the high upfront cost is another key barrier to its uptake. Hence, financing plays a crucial role in scaling up electric vehicles in India.

About 40-lakh motor vehicles are sold every year in India out of which only a quarter are purchased outright. The rest 75% are financed by banks, non-banking financial institutions and others. Banks account for about 60% of the total vehicle lending in the country.

According to the Reserve Bank of India data, in 2019 the total vehicle lending was ₹4.7-lakh crore. The data also shows that banks offered ₹10,155-crore in loans in the December 2019 quarter compared with ₹3,833-crore in the same period in 2018. All these loans were majorly disbursed for conventional internal combustion engine vehicles as EV forms less than 1% of India’s total motor vehicle fleet.

Delhi Government’s EV policy has an ambitious target of having a 25% share of battery electric vehicles in new vehicle registrations by 2024. Photo credit: Roberto Schmidt/ AFP Photo

This shows that even with a limited number, financing electric vehicles is a big challenge in India. When it comes to financing a conventional vehicle, banks and financial institutions mostly look at the buyer’s paying capacity. However, in the case of EVs, additional factors like vehicle longevity, battery life, resale value are also considered. All these concerns and risk factors result in higher interest rates, higher down-payment and shorter repayment periods.

Another peculiar thing about EV finance is that unlike conventional vehicle finance, there are no standard practices and policies for EV finance. Different bank branches have different lending terms based on their risk appetite.

A WRI India survey looking at electric vehicle finance practices by banks in Delhi brought some interesting insight on the financing of various categories of EVs in Delhi.

Electric Cars

Perhaps, this is the only segment where banks are relatively comfortable in lending for personal use. The interest rate charged by most banks is marginally higher than conventional cars. The finance is available for a period of three to seven years and one can get up to 100% of the vehicle value financed. The loan approval, however, is heavily dependent on the customer’s CIBIL score and repayment capability.

Electric two-wheelers

In this segment, there are hardly any loans available for customers. Leaving a few private banks, most banks do not finance vehicles in this segment. Also, public banks do not usually finance more than 75% of the vehicle value and the loan repayment period is usually very short (less than a year). The rate of interest could be as high as 14%. Currently, less than 5% of electric two-wheelers are financed, compared to more than 60% of petrol two-wheelers.

Electric three-wheelers

The availability of bank loans for electric three-wheelers (e-rickshaws and e-autos) is even low as compared to two-wheelers. While the banks are reluctant in providing loans to this segment, NBFCs are the only source of finance.

In addition to this, high loan repayment default rate (almost 30%) along with low ticket size are the main reasons bank want to de-risk themselves from financing this category of vehicles.

Taxi’s and commercial electric vehicles

There is an additional set of challenges for the commercial electric vehicle segment. The viability and profitability of the business (an important loan approval criterion for this segment) are highly uncertain. EV business models also have longer break-even period due to the higher cost of vehicles. Banks usually provide a loan based on personal or institutional credibility and the rate of interest is higher compared to conventional vehicles.

Although the availability of finance for electric cars is good news, it will not transform India’s motor vehicle mix as around 70% of the country’s fleet comprise of two-wheelers, another 18% are mainly of small and affordable vehicles like shared, public transport, goods vehicles and economy cars.

Therefore, the benefits of reduced vehicle emission can only be observed when there is an uptake of electric vehicles in the two-wheelers, three-wheelers, and taxi segments.

Banks and other financial institutions are not willing to support competitive financing for most EV segments due to various reasons, but the crux of the problem is a lack of substantive demand. One way to spurt the demand is by bringing down the cost of financing of these vehicles.

Delhi Government’s EV policy, which provides a 5% interest rate subvention for a selected segment of vehicles, is an innovative approach. The right implementation of the scheme may well be the catalyst for a zero-emission vehicle future.

Amit Bhatt is the executive director and Garima Agrawal is a manager at WRI India.

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