New Delhi: The electric vehicle (EV) industry, especially in small commercial intra-city transportation, is transforming rapidly. The increasing adoption of EVs, driven by their lower cost of ownership, ease of driving, and environmental benefits, presents substantial opportunities for financial institutions. Sectors such as passenger mobility, e-commerce, and mid-mile logistics are turning to electric solutions, making EV financing crucial for supporting this transition. However, unlocking this potential is not without challenges. This article explores these challenges, highlighting strategies to mitigate risks and ensuring that financiers and stakeholders can fully capitalize on EV financing.
The promise and pitfalls of EV financing:
Electric vehicles, including e-rickshaws and two-wheelers, are becoming popular for businesses and individuals alike. Their appeal lies in several factors: lower operating costs, which translate into higher income for drivers, ease of driving, and significant environmental benefits. However, the EV sector is still in its early stages, with uncertainties surrounding vehicle performance, technological reliability, and market infrastructure.
One significant challenge is the unproven nature of most EVs, except for e-rickshaws, which have yet to complete a full lifecycle in the market. This uncertainty is compounded by the rapid evolution of EV and battery technology, posing difficulties related to charging infrastructure, parts replacement, and the establishment of a resale market. Additionally, the market’s fragmented nature—with small volumes of EVs spread across numerous small towns—makes it challenging for financiers to achieve the necessary scale for efficient distribution, collection, and vehicle servicing.
Another critical issue is the lack of sufficient infrastructure to support EVs. After-sales servicing, repairs, and replacement parts are limited, and charging infrastructure is still in its infancy. This results in high vehicle downtime, which in turn leads to defaults by customers who cannot generate sufficient income due to their vehicles being out of service. The challenges are further compounded by the fact that many EV buyers are first-time drivers and borrowers with no established credit or banking history, making them high-risk customers for financiers.
Key risks in EV financing:
When financing electric vehicles, the risks can be broadly categorized into two types: product or asset risk and customer or credit risk.
·Product or asset risk:
This risk arises from the unproven nature of the vehicles and the evolving technology associated with EVs. The lack of adequate infrastructure for servicing, repairs, and parts replacement, along with the absence of a well-developed secondary market, increases the risk for financiers. High vehicle downtime further contributes to this risk, as it directly impacts the borrower’s ability to make loan repayments.
·Customer or credit risk:
Customer risk primarily stems from the fact that many EV buyers are first-time drivers and borrowers. These individuals often lack a credit history, making it difficult for financiers to assess their creditworthiness. Additionally, the absence of a proven secondary market for repossessed vehicles means that financiers have limited options for recovering their losses if a borrower defaults.
Despite these risks, financing electric vehicles can be viable. For example, lenders who have financed e-rickshaws for over six years have observed that gross non-performing assets (NPAs) remain around 3.5%. When vehicles are repossessed and resold, net losses can be maintained below 1%, with vehicles fetching an average of 80% of the loan principal outstanding upon resale. This demonstrates that, in practice, many of the perceived risks in EV financing do not materialize to the extent expected.
Mitigating risks through ecosystem creation:
A critical strategy for mitigating the risks associated with EV financing is the creation of a comprehensive ecosystem. This ecosystem should involve collaboration among various stakeholders, including OEMs, dealers, fleet operators, insurance companies, and battery charging providers.
·OEMs (Original Equipment Manufacturers):
The most crucial players in the ecosystem are the OEMs, responsible for designing and manufacturing the vehicles. To mitigate risks, OEMs must offer extended warranties and performance guarantees for their products. They should also be prepared to replace or buy back vehicles that do not meet performance standards. By ensuring a high vehicle uptime of 99% and participating in loss-sharing facilities, OEMs can significantly reduce the risks for financiers.
·Dealers:
Dealers play a vital role in providing after-sales service and creating a secondary market for EVs. By refurbishing and reselling vehicles, they can help maintain the vehicle’s credibility and resale value, which is crucial for financiers.
·Fleet operators and aggregators:
Fleet operators can manage vehicles, ensure timely servicing, and track vehicle performance. Their involvement can also extend to supporting loan installment payments, thereby reducing the risk of defaults.
·Insurance companies:
Insurance providers can offer comprehensive coverage for EVs, including standalone battery insurance, and ensure prompt claim processing. This reduces the financial burden on borrowers and provides additional security for financiers.
·Battery charging/swapping providers:
These providers can serve as points of contact with customers, offering services such as battery swapping and charging while also collecting loan instalments. Their involvement can help ensure that vehicles remain operational, reducing the likelihood of defaults.
While the challenges in EV financing are significant, they are not insurmountable. By fostering collaboration across the EV ecosystem and implementing robust risk management strategies, financiers can capitalize on the growing demand for electric vehicles. The future of EV financing lies in strategic partnerships, comprehensive ecosystem support, and a commitment to nurturing the industry as it continues to evolve. With the right approach, the potential for growth in EV financing is vast, offering a promising avenue for both financial institutions and the broader economy.
(Disclaimer: Sameer Aggarwal, Founder & CEO of RevFin. Views are personal.)
To learn more about the electric vehicle ecosystem and meet the key industry leaders, click here.
