Could Priority Sector Lending Status For Electric Mobility Charge Up Adoption ?

The electric vehicles have a long way to go to lead the mobility sector in India. One of the major points of delay is the finance for the industry. NITI Aayog, Rocky Mountain Institute (RMI), and RMI India released a report in January 2022, titled Banking on Electric Vehicles in India. The report surfaces the need for Priority Sector Lending for electric mobility ecosystem. The report provides considerations and recommendations regarding the inclusion of Electric Vehicles in RBI’s priority-sector lending guidelines.

What is the growth potential for the electric mobility sector in India? Is there a need for financial support? What are the challenges in financing EVs? What is PSL, and how may Priority Sector Lending (PSL) for electric mobility help in EV growth in India?

Growth Potential for EVs in India

India committed to the EV30@30 initiative of reaching a 30 per cent sales share for EVs by 2030. This presents a huge investment opportunity of around 19.37 lakh crore ($US266 billion) between 2020 and 2030. Thus, there is a clear need for higher liquidity and a lower cost of capital for EV assets and infrastructure in India.

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The central and state governments, and private players, have been driving the growth trajectory of the sector. Consequently, the central and state governments have laid various fiscal incentives for EVs, charging infrastructure, and manufacturing. The private original equipment manufacturers (OEMs) and component manufacturers are also investing in indigenous manufacturing and supply chains. Hundreds of start-ups have been flooding the Indian market with electric solutions for mobility. Further, venture funding has become a common trend for EV start-ups due to their product and business model innovation, which are capturing as well as creating the market opportunity for EVs.

Notably, many mobility majors like Tata Motors, Mahindra, Ola Electric, Simple Energy, Omega Seiki, etc. have also made key investment announcements to a tune of INR 48,000 crores (US$6.5 billion) in the year 2021.

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Financial Support for EVs and the Challenges Therein

Government of India flagship initiatives FAME II, PLI for ACC batteries and automotive manufacturing have invested a total of INR 0.6 lakh crores ($US7.5 billion) in the EV space. Ola Electric alone is currently worth INR 0.2 lakh crores ($US3 billion). Despite the public and private sector investments and initiatives in the EV ecosystem, EV sales represent a little over 1 per cent of the market.

The end consumers are definitely the most important entity in EV adaptation. Yet, retail lending to support consumers and institutions in financing EVs has been slow to pick up. Lending by the financial institutions is still inadequate. The sector needs a huge injection of finance to the tune of INR 40,000 crores ($US5 billion) by 2025 and INR 3.7 lakh crores ($US50 billion) by 2030. What’s restricting the lending then? There are several risks, real and perceived, mostly due to the infancy of EV technology and adoption due to which financing institutions (FIs) are low in confidence in lending to the sector. Also, even if the financing is available, the EV buyers are unable to obtain terms (i.e., interest rates and tenures) that are comparable to ICE vehicles.

Key Challenges in financing EVs

Low confidence in financing mostly faces several challenges. High-interest rates of over 20 per cent render the finance unattractive, being twice that of petrol and diesel vehicles. Further, Low Loan-To-Value Ratio turns down the sentiment. Generally, the loan tenures offered are short by several months as compared to ICE vehicles loan tenure. This increases the EMIs for the same range of electric vehicles when compared to ICE options. This renders EV a less attractive option. Notably, even the options for financing are limited mostly to e-rikshaws.

Thus, the challenges are clear and so the authorities are taking effective measures fulfilling them. In India, NITI Aayog and the World Bank are setting up a $US300 million first-loss risk-sharing instrument. The instrument is intended to act as hedging and guaranteeing mechanism for banks and NBFCs. The FIs can access it in the event of payment delays on EV loans. Enhancing liquidity for the EVs, the mechanism would bring down the EV loans by around 10-12 per cent. It will also help in mobilising up to $US1.5 billion for the electric mobility sector. In addition, complementary regulatory measures supporting the risk-sharing instrument and providing an incentive for FIs to finance EVs are essential for India to achieve its EV sector growth potential. This is where Priority Sector Lending comes into play.

What is Priority Sector Lending? How would it solve financing issues of EVs in India?

Simply put, through PSL, RBI mandates certain banks to direct a specific percentage of bank credit towards the priority sectors. PSL spurs the confidence in investors toward government policies and priorities. Apart from guiding the FIs to increase credit penetration in credit-deficient segments, the PSL also institutes regulatory measures that help the sector (in this case, EVs) to access more finance.

Back in 2019, PSBs led by SBI requested priority sector recognition for retail lending to EVs to fill the gap. The idea was later endorsed by the Federation of Indian Chambers of Commerce and Industry (FICCI) and NITI Aayog as well.

Policy reforms are making EVs more economical than ICE vehicles on a total cost of ownership (TCO) basis for several segments and use cases. For example, two-wheelers for goods delivery are cheaper than ICE equivalents. Similarly, three-wheelers for passenger use (auto-rickshaws) and cars for taxis are also comparable to ICE options. Despite these merits, the ICE is more loan attractive than the electric options. As mentioned earlier, high-interest rates, short tenures, and low loan-to-value ratios present a significant burden. PSL-led low-cost and increased financing will hence be critical to driving EV sales in the country.

Priority sector status to EVs can address the lack of availability of finance. Banks that have not yet ventured into financing EVs may consider doing so. Further, for the ones already financing EVs, PSL may become a motivation to create financing options with lower interest rates and longer loan tenures.

Further, the vehicle finance market share of NBFCs has been increasing over the past five years (from sharing 43 per cent of the formal vehicle financing market to over 52 per cent in 2020). Evidently, the NBFCs are facing a liquidity crunch since 2017 which got further aggravated due to the pandemic. The co-origination of loans to the priority sector between banks and NBFCs may provide the key solution. Co-origination enables both the entities to share risks and rewards of investing in the priority sector.

The limited awareness of the EV industry has led to greater risk perception and, thus, underfinancing of the sector. Although the lending may be slower to pick up due to PSL inclusion, the system-wide shift in mindset could be a powerful catalyst in India’s EV transition.