Priority-sector lending can help unlock US$5-billion EV financing market by 2025


India’s electric vehicle (EV) finance market could reach an estimated INR 40,000 crore ($US5 billion) by 2025 and INR 3.7 lakh crore ($US50 billion) by 2030. Priority sector lending can be a crucial pathway to helping realize this potential. If designed well, it can incentivize banks to finance EVs, while institutionalizing the importance of the EV sector within the financial industry, says a new report by NITI Aayog, Rocky Mountain Institute (RMI), and RMI India.

The report, titled ‘Banking on Electric Vehicles in India’, says retail finance for EVs in India has been slow to pick up. Given the nascency of EV technology and adoption, financial institutions such as banks and non-banking finance companies (NBFCs) are not lending to EVs due to associated asset and business model risks.

Priority sector lending mandates certain banks to direct a specified percentage of bank credit to priority sectors. The report states the 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.

Amitabh Kant, CEO, NITI Aayog, said, “Reserve Bank of India’s PSL [priority-sector lending] 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.”

The report highlights that the RBI may consider various EV segments and use cases based on the parameters of 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 prioritize under PSL considering the socioeconomic potential, livelihood generation potential scalability, techno-economic viability, and stakeholder acceptability. 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 maximize 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.

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