Unravelling The Dilemma: Here's Why Banks Lag Behind NBFCs In Supporting EV Financing

Financial institutions play a crucial role in accelerating EV making and adoption. NITI Aayog and Rocky Mountain Institute estimate that the annual EV finance market will be Rs 3.7 lakh crore in 2030

By Nehal Gupta

Electric vehicles are gaining popularity globally as we strive to reduce our carbon footprint. The Deloitte report predicts that global EV sales will reach 31.1 million by 2030, up from 2.5 million in 2020. However, the industry faces challenges such as high costs, lack of consumer awareness, and limited financing options.

Financial institutions play a crucial role in accelerating EV manufacturing and adoption. In India, NITI Aayog and Rocky Mountain Institute estimate that the annual EV finance market will be Rs 3.7 lakh crore in 2030. While some NBFCs provide EV financing, only a few banks offer this service due to the risks associated with the nascent industry. To overcome these challenges, it is essential for banks to embrace EV financing and support the decarbonisation of transport.

Let's dive into the reasons why banks lag behind NBFCs in supporting electric vehicle financing. One major factor is that many banks perceive the electric vehicle industry as risky, which makes them hesitant to offer financing. Let's explore this dilemma further:

Lack of Understanding

One of the primary reasons is the lack of understanding among banking institutions about the long-term scope and benefits of the EV industry has emerged as the primary reason why they still perceive them as a niche market. This makes banks reluctant in offering accessible EV financing to customers. Moreover, a significant share of consumers are not very keen on transitioning to EVs due to the associated cost and technological obsolescence. This slow transition is further affecting the bank’s attitude negatively. These challenges have driven a segment of EV customers towards fintech and NBFCs to access financial assistance.

Asset risk of EV

The inherent risk associated with the asset in the form of damage or loss of motor, battery, and other expensive parts. Since the EV cell and the technology used in its battery are evolving at a rapid rate, many are still in the dark about the lifecycle of most of the EVs that are currently running on the road. This further makes it unclear how they would fare by the end of their lifecycle.  Additionally, there are prevalent doubts about the resale value and future demand for electric vehicles. Such notions often drive banks to levy a higher interest rate or set a requirement for higher collateral to access EV loans. This makes the financing facility extended by the banks less appealing.

Regulatory Challenges

The government of India is pushing the adoption of EVs across the nation, by launching several EV-centric incentives. However, the industry at large still lacks dedicated policies concerning financing. To elaborate, the existing financing regulations are conditioned and designed for combustion engine vehicles and do not necessarily factor in the need for EVs. This has further raised challenges in accessing financing.

How Are NBFCs Bridging The Gap In EV Financing?

Tech-driven NBFCs are leading the way in offering EV financing with seamless loan applications, competitive interest rates, and flexible repayment terms. Personalised solutions help customers overcome financial hurdles, making NBFCs a popular choice. To boost EV adoption, the government and EV players should launch awareness campaigns and promote charging infrastructure development.

The risks associated with EVs and the lack of regulatory framework have deterred banks, but with government support and industry initiatives, these roadblocks can be overcome.

The writer is the director at AMU Leasing Pvt Ltd and EMFAI.

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