Thursday, November 30, 2023

Lease financing: A growth driver for electric vehicle B2B space


By Nikhil Aggarwal

As India is focusing on increasing penetration of electric vehicles, and new business models are coming to the fore, lease financing can be a growth aggregator for the electric vehicle B2B business model.

Electric vehicles (EVs) have now become synonymous with the future of mobility. Established OEMs like Hero, Tata Motors, TVS along with disrupters like Ola Electric, Ather, Euler and IPL Tech are investing significantly in the research and development of new products. At the same time, new business models for the operation of electric vehicles and related charging infrastructure have begun to gain traction. In recent month’s companies like Zypp (2W EV last-mile delivery platform), Battery Smart (Battery Charging platform), Blu-Smart (4W EV ride-hailing platform) have raised significant venture capital to scale their business as they witness exponential growth in adoption.

This growth is also resulting in rapid growth for the leasing industry. As compared to western economies and even China, India has one of the lowest leasing rates in the world across all types of capital goods. While loans have been the dominant form of capital for the purchase of assets in India, electric vehicles are not following the same pattern for several reasons.

While petrol or diesel vehicles are viewed as single asset, an electric vehicle needs to be viewed as two distinct components – the vehicle body and secondly the battery.

Unlike petrol or diesel vehicle, referred to as an Internal Combustion Engine (ICE), which is viewed as a single asset, an electric vehicle needs to be viewed as two distinct components – the vehicle body and secondly the battery. Both these components have a different life, can be easily physically separated and hence need to also be financed separately. However, this treatment creates complications for the lending models vs. the traditional approach of considering the vehicle as a single unit.

Lenders are also concerned about the ability to sell the vehicle in case of a defaulting borrower. While vehicle recovery and auctions are a common practice for ICE vehicles with an active second-hand market, the same is yet to develop for electric vehicles. Lenders hence currently associate a very low probability of recovery in case of loan default and either doesn’t lend or increase the interest rate significantly to adjust for this perceived risk.

While large established OEMs have started to launch electric vehicle products, a disproportionate share of innovation on the product and business model is actually being done by start-ups. Like Tesla disrupted the century-long thought leadership of the big 3 auto giants, India will likely witness such a disruption from home-grown ventures in this space. On account of limited financial history, loss-making operations and yet-to-be-established business models, these companies rarely qualify for bank loans.

Leasing has been able to act as a perfect solution and fill the financing gap created due to the lack of institutional loans.

Lastly, electric vehicles require a higher upfront Capex as compared to their ICE counterparts. While over their lifetime, electric vehicles become more cost-efficient to use because the price of electricity is significantly lower than the price of petrol/ diesel, however on account of current battery prices, the upfront investment is higher. This becomes a limiting factor for end-users to switch to electric vehicles.

electric vehicle

Leasing has been able to act as a perfect solution and fill the financing gap created due to the lack of institutional loans. Leasing companies or lessors are happy to lease the vehicle and battery separately. Several electric vehicle use cases require battery swapping and leasing models are perfectly suited for the same as lessors are interested in maximizing asset utilization. Lessors also have an ecosystem to re-deploy a vehicle in the case of default and don’t necessarily have to depend on a second-hand market for selling.

A high depreciation rate of 40% and a low GST of 5% on electric vehicles makes leasing more profitable for lessors.

Finally, in the case of a lease, the lessee doesn’t have any upfront cost and hence the barrier to adoption is reduced. The lessee only pays a monthly rental which is blended for the Capex and operating cost and becomes more cost-efficient than an ICE vehicle.

Some thoughtful initiatives from the government have helped the leasing of electric vehicles become even more viable. A high depreciation rate of 40% and a low GST of 5% on electric vehicles makes it more profitable for lessors. Further several low-speed electric vehicles do not require any registration and hence the operational challenges are further reduced.

It’s no wonder then that majority of the electric vehicles on the road today, especially those that are being used for commercial applications like transport of goods, ride-sharing is operating under a lease model. Zypp, India’s largest last-mile delivery platform based on 2W EVs has 1,000 bikes taken on lease from electric vehicle focused leasing platforms like Grip Invest. Similarly, OEMs like Euler (3W) and IPL Electric (60Tn HCV) have partnered with Grip Invest to provide their vehicles on a lease model to companies like Tata Steel, Flipkart and Big Basket. Ather also offers a popular leasing model for its bikes via its financing partner Autovert.

Also Read: Auto insurance: Artificial Intelligence is transforming pre-inspection of vehicles

(Nikhil Aggarwal is the Co-founder and CEO of Grip Invest.)

(Disclaimer: The views expressed in the article above are those of the author’s and do not necessarily represent or reflect the views of Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)


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