Electrification has been one of the major focal points in the climate-tech sector globally, and the same is true for the Indian Electric Vehicles (EV) sector. The sector is on the cusp of growth and is experiencing strong tailwinds from favourable government policies and significant capital investments across the ecosystem. Innovation and growth exist on all fronts, from OEMs to battery technology to charging and swapping infrastructure. However, there is a critical piece of the value chain that has been a little slow to catch up – EV financing.
Conventional vs Electrical Vehicle Financing
Vehicle financing is not a new concept. In fact, India’s vehicle loan portfolio is heading towards a whopping $60 billion. So, what is it about underwriting EVs that makes it a challenging category from a financier’s point of view?
The biggest roadblock in EV financing is the inherent risk of the asset itself. EVs in India are at a nascent stage and the cell & battery technology is changing continuously. We are yet to see the end of the lifecycle for most of the vehicles on the road today. An organized secondary market for EVs is non- existent and even if it were not, there is uncertainty around reaching a fairly accurate residual value for the batteries. Difference in utilization and maintenance can lead to distinct degradation curves for the same battery type. So, in addition to the technology risk there is a risk around value retention of the vehicle which makes EVs a high-risk asset class. All this translates to high interest rates, shorter loan tenures and lower LTVs.
It is believed that the early adoption and penetration of EVs in India will be led by the 2W and 3W commercial market, a market that depends the most on financing. EVs have achieved competitive TCOs (total cost of ownership) with respect to ICE vehicles but there is a significant upfront outflow. Despite the operational economics being favourable, absence of viable financing options is a bottleneck to adoption at scale. This is a problem that needs to be solved, and rather quickly.
Solving the Risk in EV Financing - Emerging Models
Several new-age start-ups are building solutions to cater to this very issue. We see diverse business models emerging in the space - unique underwriting techniques for borrower risk, facilitating buy- back programs in partnership with the OEMs, separate subscriptions for batteries (which essentially forms upto 40% of the total vehicle cost), real-time data-driven models that help ascertain the value of a battery at any given time and many more. Many traditional players have now shifted their focus towards the sector. We believe that more than a pure-play lending problem, it also about understanding the lifecycle of these vehicles. Companies that are leveraging technology and data to build pricing capability on the asset through its lifecycle will surely see a lot of traction because at the end of the day any financier, traditional or new age, is looking for an answer to this question.
The Need Gap & Scope for Execution Excellence
A report by NITI Aayog estimates that India needs to mobilise roughly $50 billion in EV financing by 2030 to meet its commitment towards EV30@30. Facilitating this would require a multi-stakeholder approach – intervention from policy makers and accountability from industry players. There have been several routes proposed on this including in the PSL guidelines, some form of risk- sharing mechanism, accelerated development of secondary markets, and warranties & buy-back guarantees from OEMs. We will have to wait and see how one fairs against the other and is operationalized to drive down the cost of capital. As the industry navigates the nuances of various business models, we believe EV financing is a huge market opportunity in India awaiting execution excellence.
How Merisis can help - Contact Us
The Transportation sector has seen a renewed focus post the pandemic as it highlighted the relevance of logistics and supply chains. The sector has seen significant growth in recent years in the number of emerging start-ups, interest from investors, and policy push from the government. The sector has also seen the most impact from the increased clean tech focused funding as electrification emerged as a key theme.
The Transportation & CleanTech vertical at Merisis advises companies across various sub-sectors and facilitates their funding and M&A plans leveraging our deep connections in the ecosystem. Merisis has worked with category creators across this vertical and has strong relationships with a diverse set of Indian and global investors, which allows us to add value to our clients by finding the right partner. Read more
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