RMI Releases Report On Mitigating Financial Risks In EV Lending

RMI Release Report On Mitigating Fianacial Risks In EV Lending For EVs

The RMI released a report that sheds light on the challenges encountered in extending loans for internal combustion engine (ICE) two- and three-wheelers due to the prevalence of new-to-credit (NTC) borrowers.

The report emphasizes mitigating risks in lending for the acceleration of electric vehicle (EV) adoption and provides an in-depth analysis of the financial landscape from the perspective of lenders. These borrowers, constituting nearly 50% of two-wheeler customers, are navigating formal credit cycles and often exhibit significant payment delays, with a portfolio at risk (PAR) of 4% for two-wheelers in September 2022. Consequently, financiers heavily rely on robust collection systems and resort to secondary markets for default recovery.

Furthermore, the RMI in its report underscores the pivotal role of the two and three-wheeler segment, which accounts for 80% of vehicles on the road as of March 2024, serving as vital modes of passenger mobility and goods transportation. The report mentioned, “While financiers have historically benefited from a well-established secondary market for ICE vehicles, the case differs for electric counterparts, posing heightened risks across various fronts, including counterparty, product, operations, repossession, and residual factors. Notably, the report highlights that EV loans incur a monthly cost 5% to 14% higher, on average, compared to ICE vehicle loans.”

Historical sales of electric two- and three-wheelers

The report mentioned the second pillar, the report outlines specific criteria crucial for original equipment manufacturers (OEMs) and financiers. It advocates prioritizing OEMs offering EV models meeting stringent quality, safety, and performance standards, alongside warranties aligned with financing tenors and robust after-sales maintenance services to mitigate operational risks. Additionally, “Financiers are advised to select creditworthy commercial banks and non-banking financial companies (NBFCs) with relevant experience in managing EV lending risks, including those active in ICE vehicle finance. This ensures adequate expertise in underwriting, assessing technology and OEM providers, managing operational risks, and scaling lending portfolios, with considerations adjusted for the nascent state of the EV financing ecosystem.”

Financiers and Their Lending Preferences

The report explained, “The primary formal sources of electric two- and three-wheeler financing are scheduled commercial banks and NBFCs, which approach EV financing based on their unique risk profiles and targeted returns. The cost of lending to the end customer is typically a function of the cost of capital for the financier, the operating costs of the financier, and the risk premium charged on the loans. Factors impacting the risk premium include the credit risk of the borrower, the quality of collateral to be provided and depreciated, or the residual value of these assets, as well as operating and technical risks associated with
the business models. These factors influence the expected credit losses and returns for the financier, which have a significant impact on the terms offered to the borrower.” 

In the realm of electric two and three-wheeler financing, scheduled commercial banks and NBFCs serve as primary formal sources, tailoring approaches based on unique risk profiles and targeted returns. The cost of lending to end customers hinges on factors such as the financier’s cost of capital, operating expenses, and risk premiums, influenced by borrower credit risk, collateral quality, residual asset value, and operational and technical risks. These factors ultimately shape credit losses and returns, significantly impacting borrower terms.