Case Study: Funds to Mitigate Loan Defaults for Electric Two-and-Three-Wheeler Lenders

In 2022, SIDBI and the World Bank began engaging with financial institutions and manufacturers to understand how to improve the availability of commercial financing for electric two-and-three-wheelers and to develop a risk-sharing program for financial institutions interested in this market.

This adapted article explores the challenges, opportunities, and innovative solutions that have emerged from the collaboration between SIDBI, the World Bank, and stakeholders in the electric vehicle sector.

The government, the World Bank and the Small Industries Development Bank of India (SIDBI) are set to launch a $1 billion fund to provide guarantees against loan default to lenders financing the purchase of electric two-and-three-wheelers.

SIDBI and the World Bank have started interacting with financial institutions and manufacturers to understand how to improve the availability of commercial financing for electric two-and-three-wheelers and to develop a risk sharing program for financial institutions interested in this market. This process is facilitated by a Korean grant secured by the World Bank that was signed on September 26, 2022 with SIDBI.

The entities will initially set up a $300 million “first loss risk sharing instrument”. The funds would be available to all financial institutions to access as a first loss instrument. The instrument would act as a hedging mechanism, for banks to access in case of defaults on loans for the purchase of electric vehicles. This is expected to bring down the cost of financing EVs by 10-12 percent.

Currently, the interest rate on loans for the purchase of electric two-and-three-wheelers is 20-25 percent. Partial credit guarantee and first loss risk sharing instruments are some of the most effective financial solutions to facilitate the transition and increase the uptake of electric mobility. Niti Aayog is the nodal agency for the project, which aims to facilitate faster and easier financing of electric vehicles.

In October 2021, it was reported that government think tank Niti Aayog and the World Bank were in talks to set up a $300 million loss-sharing mechanism to compensate banks that lend for the purchase of electric vehicles. Total financing under the program was estimated at around $1.5 billion.

The State Bank of India was considered to lead the program, but pulled out of the partnership because banks still view EVs as a risky segment. SIDBI will now be the implementing institution for the program. SIDBI has recently been at the forefront of India’s efforts to achieve sustainable development goals by working with several small and medium enterprises to increase energy efficiency in their operations.

Over the past year, NITI Aayog and the World Bank have interacted closely to understand how to accelerate the energy and transportation transition being pursued under the Government of India’s Transformative Mobility and Battery Storage Program. While many supportive policies and incentive programs have already been put in place, financing for electric vehicles remains scarce and expensive for two-and-three-wheelers, especially for the many Indians with lower credit scores.

Banks have continued to shy away from this segment, having burned their fingers and lost money financing e-rickshaws and other two-and-three-wheelers powered by lead-acid batteries. Even as banks have kept their distance, questioning the commercial viability and resale value of these vehicles, several non-bank lenders and digital financiers have taken the lead in financing this segment.

The real driver of India’s electrification will be two-and-three-wheelers, as they are used by the masses for last-mile connectivity due to their low cost of operation. If the last five months are any indicator, EV sales will cross one million units in the current fiscal year 2023, up 84 percent from the last fiscal year.

Electric three-wheeler usage in India. Suman Kumar (n.d.)

Conclusion

Leading the race are electric two-wheelers, which will grow by 117 percent to 750,000 units, followed by three-wheelers at 12 percent to 200,00 units. Experts point out that the hinterland is seeing faster adoption as fuel prices rise and consumers opt for cleaner and greener mobility.

Accordingly, the challenge today is to scale up financing in India at a pace that catches up with this major transportation and energy transition.

References

• Lijee, P; Saloni, S. (2022) *Launch fund against loan default to lenders financing purchase of electric two-and-three-wheelers. * Retrieved from: Link