Is EV Funding the next El Dorado?

November 22, 2024 By: Kedar Deshpande0 comments

The Electric Vehicle (EV) sector, propelled by calls for greater sustainability in our day-to-day lives, technological advancements, government incentives, and rising environmental concerns, has emerged as one of the most promising sectors of our time. EVs now are a serious choice-contender both in the Consumer and Commercial vehicle space.  Such surge in EV adoption has naturally led to a parallel boom in EV financing, making it an attractive proposition for Non-Banking Financial Companies (NBFCs).

The Allure of EV Financing

The superior efficiency, lower maintenance costs, and reduced carbon emissions of EVs have made them increasingly popular among consumers. Emerging use cases like quick commerce last-mile delivery services and casual personal mobility, are further expanding the markets for EVs. The comparatively relaxed regulatory framework for low-speed two-wheelers has also contributed to their growing popularity, especially among students and casual urban commuters.

With availability of seed equity funding, relatively low barriers to entry, and policy support, the EV financing landscape offers a compelling opportunity for financial institutions. More than the traditional “Wheels-Financing” companies it is the newer players that have taken the lead in EV financing.

Navigating the Risks

While the potential rewards of EV financing are significant, it is crucial to acknowledge the associated risks from the perspective of new players. Key challenges include:

• Evolving Technology: The evolving nature of the core battery and charging technologies in the EV market introduces uncertainties related to interoperability, adoption at a scale, serviceable battery life, and reliable charging infrastructure.
• Obsolescence and a Nascent Secondary Market: Rapid technological advancements can lead to rapid obsolescence of older models impacting the resale value of vehicles and, consequently, the recovery potential for lenders. Presently there is lack of a robust and reliable Secondary market for sale and purchase of EVs as compared to the Internal Combustion Engine (ICE) based engine vehicles.
• Credit Risk: Aggressive funding competition driven by the need of instant decisioning has given rise to thin-file underwriting. Consequently, normalising risker credit calls leading to higher than acceptable risk of default. This is further compounded by negligible recoveries for the financer from repossessed EVs.

A Cautious Approach

To mitigate these risks, lenders must adopt a cautious approach. The development of a funding ecosystem, with OEMs, dealers, and charging infrastructure providers as active participants, would bolster efforts to scale up this segment swiftly.

Strategic Partnerships: Lenders must collaborate with OEMs, Battery manufacturers as well as charging infrastructure providers to gain insights into the commercial workings of EVs such that optimal funding both Quantum and Tenure wise can be ensured. Funding models where money is released to the OEM or Dealers directly or as part of reversals of Working Capital Term Loan Advances would affirm intended end-use.

Steadfast Holding-Up of First Principles of Credit Underwriting

1. Due Diligence: Continuing to thoroughly assess the creditworthiness of borrowers and the overall viability of the EV business model and thereby ensuring credit hygiene and more.
2. Diversified Portfolio: Spread risk across various segments – Personal, Commercial, Two Wheelers, Three Wheelers and the likes of the EV market to minimize exposure to segmental risks. For example, Quick Commerce led 3Wheeler EV deployment for deliveries in newer parts of the city with gated communities may intuitively see better returns compared to deployment in an area dotted with vintage Mom-and-Pop led shops.
3. Robust Risk Management: Implementing robust early warning systems for risk management would help monitor and manage potential risks.

Conclusion

The EV financing market presents a significant opportunity for financial institutions. However, it is crucial to approach this emerging sector with a balanced perspective. While the allure of high yields and rapid growth is undeniable, it is essential to prioritize prudent risk management. By adhering to sound lending principles and maintaining a unwavering focus on strong customer selection, asset quality, and risk mitigation, lenders can harness the potential of this transformative industry while at the same time safeguarding their portfolios.

Just as the legendary city of El Dorado promised riches but often delivered disappointment, the EV financing market offers both promise and peril. By learning from history and adopting a cautious approach, lenders can navigate the complexities of this dynamic landscape and emerge as successful players in the future of mobility.