Banking on Electric Vehicles in India-Jan 2022
A Blueprint for Inclusion of EVs in Priority Sector Lending Guidelines
23 JAN 2022
NITI Aayog, Rocky Mountain Institute (RMI), and RMI India today released a report, titled ‘Banking on Electric Vehicles in India’, which outlines the importance of priority-sector recognition for retail lending in the electric mobility ecosystem. The report provides considerations and recommendations to inform the inclusion of EVs in the Reserve Bank of India’s (RBI’s) priority-sector lending (PSL) guidelines.
Banks and non-banking financial companies (NBFCs) in India have the potential to achieve an electric vehicle (EV) financing market size of Rs 40,000 crore (USD 5 billion) by 2025 and Rs 3.7 lakh crore (USD 50 billion) by 2030. However, retail finance for EVs has been slow to pick up.
“Financial institutions have an important role to play in accelerating the adoption of EVs in India and supporting the decarbonisation of road transport,” said Amitabh Kant, CEO, NITI Aayog. “RBI’s PSL mandate has a proven track record of improving the supply of formal credit towards areas of national priority. It can provide a strong regulatory incentive for banks and NBFCs to scale their financing to EVs.”
Priority-sector lending aims to expand financial access and support employment opportunities in India. In order to meet these goals, the report highlights that the RBI may consider various EV segments and use cases based on five parameters: socio-economic potential, livelihood generation potential, scalability, techno-economic viability, and stakeholder acceptability.
“Buyers are unable to access low-interest rates and long loan tenures for EVs as banks are concerned about resale value and product quality. Priority-sector lending can encourage banks to fast-track India’s transition to EVs and help achieve our 2070 climate goals,” said Clay Stranger, Managing Director, RMI.
The report indicates that electric two-wheelers, three-wheelers, and commercial four-wheelers are early segments to prioritise under PSL. Moving forward, the engagement of other ministries and industry stakeholders will be important to ensuring the guidelines designed can effectively enhance EV investment in India.
To maximise the impact of the inclusion of EVs, the report also recommends a clear sub-target and penalty mechanism for priority sector lending to renewable energy and EVs. Furthermore, it suggests recognition of EVs as an infrastructure sub-sector by the Ministry of Finance and the incorporation of EVs as a separate reporting category under the RBI. Multiprong solutions such as these are needed not only for EV penetration and businesses, but also for the financial sector and India’s 2070 net-zero target.
- NITI Aayog, RMI, and RMI India, Banking on Electric Vehicles in India: A Blueprint for
Inclusion of EVs in Priority Sector Lending Guidelines, January 2022. http://www.rmi.org/
- Available at RMI India: https://rmi-india.org/insight/banking-on-electric-vehicles-in-india.
- Available at RMI: https://rmi.org/insight/banking-on-electric-vehicles-in-india.
Purpose of This Report
This report, Banking on Electric Vehicles in India, aims to:
• Outline the structure, mechanics, and history of PSL
• Propose considerations to inform the design of guidelines for including EVs in the PSL guidelines
• Summarise actions needed to implement and ensure the success of EVs as a priority sector
Highlights of the Report
• Cumulative investment in India’s
electric vehicle (EV) transition could
be as large as INR 19.7 lakh crore
($US266 billion) between 2020 and
2030, highlighting the need for higher
liquidity and lower cost of capital for EV
assets and infrastructure. The recently
announced first-loss risk-sharing instrument
led by NITI Aayog and the World Bank has the
potential to meet this gap.
• Including EVs in the Reserve Bank of India’s
priority sector lending (PSL) guidelines can
complement the $US300 million facility and
encourage the financial sector to mobilise necessary capital.
• Priority sector lending mandates certain banks to
direct a specified percentage of bank credit to
priority sectors. Inclusion for retail lending to EVs
has the potential to increase investor confidence
by providing a market signal of ongoing government
commitment to the sector. It can also ensure
a swift and equitable transition by providing a
mandate for financial institutions to direct credit
to segments and use cases where credit deficiency
persists despite compelling economics.
• Electric two- and three-wheelers, as well as fourwheelers in commercial use cases, represent
favourable segments towards inclusion of EVs in
priority sector lending due to greater need for
formal credit, higher potential for job creation
and scale in urban and rural areas, relatively high
sales forecasts, greater model availability, and
smaller gap to parity in total cost of ownership.
• To operationalise the concept of including EVs
in priority sector lending, central government
policymakers can liaise with the Reserve Bank of
India to design and issue the requisite guidelines.
Financial institutions and the EV ecosystem can
contribute by outlining how PSL inclusion can
influence their growth and investment plans. This
report can serve as the basis for this discussion.
• While this intervention is promising, it will
not solve the financing challenges alone and
a variety of persistent risks to EV finance
remain. Additional policy and market measures
to address those challenges include statelevel fiscal incentives, open data on vehicle
performance, industry-led buyback programmes, and loan guarantee facilities.
Opportunity: Recent investments in India’s EV ecosystem
India’s commitment to the EV30@30 initiative—to reach a 30 percent sales share for EVs by 2030— presents a cumulative investment opportunity of as large as INR 19.7 lakh crore ($US266 billion). There has been a recent increase in public budgetary allocations and corporate investment in EVs in order to achieve this (see Exhibit 1). Central and state governments have approved fiscal incentives for EVs, charging infrastructure, and manufacturing that are helping achieve parity in total cost of ownership with internal combustion engine (ICE) vehicles for several segments and use cases. Original equipment manufacturers (OEMs) and component manufacturers are investing in indigenous manufacturing and supply chains. EV startups are attracting significant venture funding due to their product and business model innovation, capturing as well as creating the market opportunity presented by EVs.
Challenge: Low Liquidity for EVs in Today’s Market
The public and private sector investments and initiatives in the EV ecosystem are accelerating capital deployment towards India’s electric mobility transition. Government of India flagship initiatives FAME II, PLI for ACC batteries and automotive manufacturing alone total INR 0.6 lakh crores ($US7.5 billion). Ola Electric alone is currently worth INR 0.2 lakh crores ($US3 billion).11 However, in terms of sales, EVs represent a little over 1 percent of the market. At the same time, retail lending to support consumers and institutions in financing EVs has been slow to pick up. Financial institutions (FIs) have not yet increased lending to the level that would be required—an estimated INR 40,000 crores ($US5 billion) by 2025 and INR 3.7 lakh crores ($US50 billion) by 2030. Given the nascency of EV technology and adoption, FIs such as banks and non-banking finance companies (NBFCs) are not lending to EVs due to associated asset and business model risks . These risks are both real (e.g., uncertainty of resale value) and perceived (e.g., product quality). As a result, if financing is available, EV buyers are unable to obtain terms (i.e., interest rates and tenures) that are comparable to ICE vehicles.
Overview of Priority Sector Lending and the Opportunity for EVs -Priority Sector Lending
The Reserve Bank of India (RBI) introduced the priority sector lending (PSL) guidelines in 1972 to expand financial access to vulnerable sections of society by enhancing credit for “priority” sectors with high employment and poverty alleviation potential but low bankability. The guidelines mandate that banks subjected to the regulation direct a specified target percentage of adjusted net bank credit (ANBC) to priority sectors. Current priority sectors that can receive this credit include agriculture; micro, medium, and small enterprises (MSMEs); housing; renewable energy; education; social infrastructure; export credit; self-help groups and startups; and weaker sections of society. Of these, agriculture, microenterprises, and weaker sections have sub-targets that all banks are required to achieve. Also, different types of banks are required to meet different priority sector targets, based on their regional spread and access to priority sectors.
Incentivising banks to lend to EVs: Inclusion can directly incentivise banks to enhance lending as a part of priority sector targets. Banks that have not yet ventured into financing EVs may consider doing so; banks that already finance EVs may be motivated to create specialised financing options with lower interest rates and longer loan tenures (e.g., SBI’s Green Car Loan or Union Bank’s Green Miles).34 Overall, a mechanism to encourage a higher supply of credit can motivate borrowers opting for informal sources of financing (e.g., e-auto rickshaw drivers) to seek bank financing.
Incentives, investment, and innovation are driving India’s rapidly increasing EV adoption. Finance will be critical to achieving scale. However, the real and perceived risks of a relatively new asset class have meant that financial institutions like banks and NBFCs have not yet built up their confidence or capabilities of financing the sector.
India’s EV finance market could reach INR 3.7 lakh crores ($US50 billion) in advances by 2030.47 Priority sector lending can be a crucial pathway to helping realise this potential. If designed well, it can incentivise banks to finance EVs and improve finance for NBFCs, while institutionalising the importance of the EV sector within the financial industry.
Considering socioeconomic potential, livelihood generation potential scalability, technoeconomic viability, and stakeholder acceptability, market-ready electric 2Ws, 3Ws, and commercial 4Ws currently offer the ideal starting point for PSL inclusion. To enable this reform, several actors will need to align on a vision and also consider supplementary solutions. Implementing the solutions outlined in the report can help maximise the impact of PSL inclusion for EVs.