Several major banks, including State Bank of India (SBI) and ICICI Bank, are advocating for the classification of electric vehicle (EV) loans under the Priority Sector Lending (PSL) framework. This move, aimed at easing the credit flow to India’s growing EV market, was discussed during a recent meeting with Niti Aayog. Banks believe that by reclassifying EV loans, they can significantly reduce the risk weightage on these loans and free up capital for additional lending.
The PSL guidelines require banks to allocate 40% of their net bank credit to sectors such as agriculture, micro-businesses, and other disadvantaged industries. Reclassifying EV loans could thus open up more funding for the electric vehicle sector, which is expected to require an estimated Rs 45,000 to 55,000 crore by 2026 to drive India’s green transformation.
Traditional financing models, which were originally designed for internal combustion engine (ICE) vehicles, do not suit the unique characteristics of electric vehicles. EVs, for instance, suffer from reduced value once the battery is no longer functional, a factor that hampers their financing options. This is why financial institutions are urging a rethinking of loan structures to support the EV sector.
Lowering the risk weightage for EV loans could result in more capital being available for other uses, thereby stimulating further investments in the EV ecosystem. A key proposal is to adjust the risk weightage from the current 100% to a lower threshold, allowing banks to better support the growing demand for EVs.
Despite the push for favorable financing terms, challenges persist in making EV financing affordable. Banks have expressed concerns about the resale value of EVs and their product quality, limiting the availability of low-interest rates and extended loan tenures. As a result, buyers of EVs often face higher down payments, shorter loan tenures, and interest rates 1-9% higher than those for traditional vehicles.
The Reserve Bank of India (RBI) is expected to evaluate various EV segments and determine which are eligible for PSL status based on factors like scalability, socioeconomic impact, and feasibility. As EV adoption accelerates, resolving these financial barriers will be crucial to ensuring that India can meet its green energy goals and boost the adoption of electric mobility.
