This probably sounds obvious, but every single commercial vehicle on the road is acquired on credit. But what you might not have thought about is how behind a simple loan is a vast financial infrastructure built up and refined over the many decades since the internal combustion engine was invented.
The catch is that this entire financial ecosystem has been built around ICE vehicles.
There are millions of vehicles running on petrol, diesel, and natural gas. How they age, how big the used or secondary market is, how much a vehicle is worth 2, 3, 5 years after purchase, how makes and models from different OEMs are valued—there is historical data for all of this, and the dynamics of the market are well understood.
For EVs, there’s just very little historical information, given how young the market is.
For any kind of loan backed by an asset, a big part of the cost of credit will be determined by how much the asset can be sold for if the borrower stops paying. The term bankers use for this is “residual value”—i.e. if someone defaults on a loan for a vehicle after two years, how much can the lender get for it? In simple terms, the higher the residual value, the lower the monthly EMI. And the lower the residual value, the higher the EMI.
The perception of residual value is low for EVs right now, because:
Nascent secondary market
There isn’t a strong resale market for EVs yet, since the majority of EV sales are recent.
Battery lifetimes
Lenders aren’t sure about how batteries—30-40% of a vehicle’s price—age and wear out.
Battery aging in particular was a serious issue with early electric three-wheelers, with poor quality batteries that would degrade in a few years, which isn’t the case with good LFP batteries today.
On top of that, long charging times raise the question of how many kilometers drivers can do in a day, which limits how much they can earn and in turn whether they can repay their loans, increasing the probability of defaults.
The lack of certainty around this means that a lender today charges about 2-3 percentage points more in flat interest rates for a three-wheeler EV as opposed to a diesel or CNG one (IRR (Internal Rate of Return) rates can be as much as 4-5 percentage points more). And most financiers are open only to a three-year tenure, sometimes four years, instead of five years for ICE.
What do these EV financing costs look like right now, for both large fleet companies and smaller operators such as DCOs (Driver-cum-owners) and SFOs (Small freight operators) ?
Term loan
Financial Lease
Figures represent interest rates on a reducing or IRR basis
For fleet companies, financing isn’t as much of an issue since they get better terms and also can show large contracts to get term loans from banks for their asset purchases.
For very small operators and DCOs, getting a loan at all remains a struggle; an estimated ~40% of them have historically relied on informal credit to finance their diesel and CNG vehicles. When you look at the Indian three-wheeler market, DCOs and SFOs own about 70% of cargo vehicles and almost 100% of autos, according to industry estimates.
The current rates and terms easily translate into Rs 2,000-3,000 more every month in EMI payments for them. That’s offset by lower running costs for electricity versus fuel—which is why electric three-wheeler sales are surging, especially in the cargo space—but that financing cost needs to come down.
What? Why?
There are four main factors on which commercial EVs are progressively getting de-risked from a financing perspective, or are already better than ICE vehicles.
Longer chassis life
This is a point that has been emphasized by vehicle manufacturers—EVs have fewer moving parts and significantly less wear and tear than ICE machines. This results in lower maintenance costs and less frequent maintenance checks required for the end user, but it also means that, if anything, the residual value of the chassis or body of an EV should be better than that of an ICE chassis.
At the very least, when it comes to financing, the body of an electric commercial vehicle should be valued similar to an ICE one.
Improved battery life cycles
A good modern LFP battery can be charged and discharged thousands of times throughout its life. (We provide a warranty of 3,000 rapid charging cycles on our e^pack.) They also have the advantage of the cells not aging over time like with some other, more expensive battery chemistries.
This means that a vehicle with a good battery should be able to fetch a decent price in the secondary market if need be, so the residual value as a lender sees it should go up.
Rapid charging = better earnability
A key limitation of slower charging vehicles is that a driver can only do so many kilometers in a day before having to charge for multiple hours. Fleets get around this by having two vehicles per driver, but that’s not viable for a small operator. This effectively limits how much business they can do in a day.
But faster charging removes this as a concern, since drivers only have to stop for 10-15 minutes at a time and can continue driving and earning through the day. This improves their income, which improves their creditworthiness.
EVs are digital
EVs are fundamentally connected vehicles. They’re digital at multiple layers, from the battery management system to the controllers to the dashboard. This means that there’s a ton of data on how much a vehicle is being used, how it’s been run, how healthy the battery is, and so on.
Lenders can incorporate this data and build credit underwriting models in a way they never could with ICE machines. Plus, if a borrower defaults at any point, it’s easier to track down the vehicle and seize or remotely freeze the asset. With a diesel or CNG vehicle, you could in theory add some kind of GPS device, but that could always be ripped out by a defaulting borrower—it’s not a solution inherently baked into the vehicle. A point to keep in mind: Finance is as much about collections as it is about issuing credit.
Again, close to half of DCOs have poor access to formal credit today in the ICE vehicle world. The fact that an EV is a connected product could actually drive financial inclusion by making it possible for them to access regular financing.
All of this fundamentally de-risks EVs as a commercial asset.
But we also think the industry can do one better for DCOs and SFOs.
Re-think the battery
A driver’s work and income are fundamentally volatile, and so far, no financing solution has delivered flexibility to account for that, whether with ICE or electric vehicles.
For drivers and small fleet owners, business varies from month to month, peaking in the festive season in October-November. In the good months, a higher EMI might not be as much of an issue, but in the dry months, spending even a couple of thousand rupees more on the vehicle is tough. (Add to this the concern of what to do when a vehicle’s battery hits its end of life.)
An entirely EV-specific financing solution is to directly finance/lease only the vehicle, while the lender takes ownership of the battery and the vehicle operator rents the battery on a per-kilometre rate. When the battery warranty runs out, the financier replaces the battery and the driver continues to rent it (alternatively, the driver can buy the out-of-warranty battery for a small cost).
This battery-as-a-service approach links the driver’s financing costs to usage.
A Rs 2,000 difference between full-vehicle financing and battery rental plus chassis financing might seem like a small margin, but when running a business on monthly cash flows, it can be huge.
There are multiple advantages to Battery-As-A-Service:
The fixed monthly EMI the driver has to pay drops by about 40%.
Lenders should be fairly comfortable financing the chassis or body of a vehicle, which they understand much better than a battery.
The per kilometre battery rental means that in months when their income drops, their costs also drop.
EV financing is usually for 3 years, but here the battery can effectively be rented over a longer period of 4-6 years, depending on usage and how many kilometers the battery is warrantied for. (The industry average is 100,000-120,000 kilometers, with Exponent-powered batteries and some others offering 150,000 kilometers.)
For diesel or CNG machines, the EMI stayed the same month on month. By splitting off the battery as an asset that is guaranteed by the OEM, we can reduce the fixed part of that monthly cost and also deliver unprecedented flexibility. And that has the knock-on effect of improving driver earnings and earnability, which in turn might just open more options for formal credit instead of going to a local moneylender.
(Eventually, battery as a service could also be bundled with charging, making it more like energy as a service. One monthly payment for battery financing and fuel/electricity use combined.)
At the end of the day, what a financing solution needs to achieve is spreading out or rebalancing the cost of an EV, while also delivering flexibility. Without that, we can’t win over India’s millions of drivers.