Electric vehicles could help tackle India’s pollution crisis – but lack of bank loans is a hindrance
Winter in Delhi, like most parts of northern India, brings poisonous air. Climatic conditions as well as episodic events like crop burning and Diwali also worsen air quality. According to State of the World Air 2018 report, air pollution is a silent killer in India and the country has lost around 11 lakh of people because of it. But that’s not all. Recent studies show that almost 27% of Covid-19 cases in East Asia are the result of long-term exposure to polluted air.
Tackling toxic air requires action on several fronts and one of these areas is reducing vehicle emissions. Studies show that in a city like Delhi, motor vehicles are the main source of pollutant emissions, contributing around 40% of PM2.5 (ultrafine particles less than 2.5 microns and responsible for health problems) .
To address vehicle emissions issues, states like Delhi are taking a holistic approach to promoting electric vehicles. Launched in August, the Delhi government’s EV policy has an ambitious goal of having a 25% share of battery electric vehicles in new vehicle registrations by 2024.
However, scaling up electric vehicles requires substantive work in terms of developing charging infrastructure, availability of electric vehicle models, public awareness, etc. On top of that, the high initial cost is another key barrier to its adoption. Hence, finance plays a crucial role in the development of electric vehicles in India.
About 40 lakh of motor vehicles are sold annually in India, of which only a quarter are purchased directly. The remaining 75% is financed by banks, non-bank financial institutions and others. Banks account for around 60% of total auto loans in the country.
According to data from the Reserve Bank of India, in 2019 the total vehicle loans were 4.7 lakh crore. The data also shows that banks offered 10,155 crore yen in loans during the December quarter of 2019, compared to 3,833 crore yen during the same period in 2018. All of these loans were mainly disbursed for vehicles at conventional internal combustion engine, because electric vehicles account for less than 1%. of India’s total car fleet.
This shows that even with a limited number, financing electric vehicles is a big challenge in India. When it comes to financing a classic vehicle, banks and financial institutions mainly look at the buyer’s ability to pay. However, in the case of electric vehicles, additional factors such as vehicle longevity, battery life, and resale value are also taken into account. All of these concerns and risk factors translate into higher interest rates, a higher down payment, and shorter repayment periods.
Another unique feature of electric vehicle financing is that unlike conventional vehicle financing, there are no standard practices and policies for financing electric vehicles. Different bank branches have different loan terms depending on their risk appetite.
A WRI India survey of electric vehicle financing practices by banks in Delhi yielded interesting information on the financing of various categories of electric vehicles in Delhi.
This may be the only segment where banks are relatively comfortable lending for personal use. The interest rate charged by most banks is slightly higher than that of conventional cars. The financing is available for a period of three to seven years and one can obtain up to 100% of the value of the financed vehicle. Loan approval, however, is highly dependent on the client’s CIBIL score and repayment capacity.
In this segment, there are hardly any loans available for clients. Apart from a few private banks, most banks do not finance vehicles in this segment. In addition, public banks generally do not finance more than 75% of the value of the vehicle, and the loan repayment term is usually very short (less than a year). The interest rate could reach 14%. Currently, less than 5% of electric two-wheelers are financed, compared to more than 60% of gas-powered two-wheelers.
The availability of bank loans for electric three-wheelers (e-rickshaws and e-autos) is even low compared to two-wheelers. While banks are reluctant to lend to this segment, NBFCs are the only source of funding.
In addition to this, the high rate of loan defaults (almost 30%) and the small size of the notes are the main reasons why banks want to reduce the risks associated with the financing of this category of vehicles.
Taxis and electric utility 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. Economy models of electric vehicles also have a longer equilibrium period due to the higher cost of vehicles. Banks usually give loan based on personal or institutional credibility and the interest rate is higher compared to conventional vehicles.
While the availability of financing for electric cars is good news, it will not transform India’s motor vehicle mix as around 70% of the country’s fleet consists of two-wheelers, 18% are mainly motor vehicles. small and affordable vehicles such as shared public transport, utility vehicles and economy cars.
Therefore, the benefits of reducing vehicle emissions can only be seen when there is adoption of electric vehicles in the two-wheeler, three-wheeler and taxi segments.
Banks and other financial institutions are unwilling to support competitive financing for most EV segments for various reasons, but the crux of the matter is the lack of substantial demand. One way to stimulate demand is to lower the cost of financing these vehicles.
The Delhi government’s EV policy, which provides a 5% subsidy at an interest rate for a selected segment of vehicles, is an innovative approach. The successful implementation of the program could well be the catalyst for a future zero emission vehicle.
Amit Bhatt is the Executive Director and Garima Agrawal is a Director of WRI India.