Banks seek to classify EV loans under PSL status to boost credit flow

Banks including State Bank of India and ICICI Bank have urged the government and the Reserve Bank of India to reclassify retail electric vehicle (EV) loans as a priority sector and reduce their risk weightage, Financial Express reported. The proposal is expected to "free up banks’ capital" for boosting credit flow to India’s burgeoning electric vehicle market. 

In a Friday meeting with Niti Aayog, financial institutions also highlighted that traditional financing models for ICE vehicles fall short for EVs—one banker noting that "EV is a different ball game. Once the battery is not there, it has little value"—while estimating that approximately Rs 45,000–55,000 crore will be needed by 2026 to drive the nation’s green transformation, the report added.

According to reports, lowering the risk weightage from 100% to a lower threshold would also free up bank money for other beneficial uses.

As EV adoption increases, Niti Aayog projected in 2022 that financing EV purchases would cost between Rs 45,000 and Rs 55,000 crore by 2026. It had stated that to fully realize this potential, the ecosystem's finance issues must be fully resolved to release the funds needed to propel India's green revolution.

According to the PSL regulations, a bank must lend 40% of its adjusted net bank credit to the so-called priority sector or economically disadvantaged industries, including microbusinesses, agriculture, and other sectors.

The RBI's PSL scheme can offer banks and NBFCs a powerful regulatory incentive to expand their financing to EVs, and it has a historical record of increasing the availability of formal credit towards sectors of national significance.

According to sources, the RBI should evaluate several EV segments and use cases for the priority sector tag based on five criteria: scalability, stakeholder acceptance, socioeconomic potential, livelihood generation potential, and techno-economic feasibility.

Concerns remain over the affordability of EV financing, as banks' reservations about resale value and product quality limit access to low-interest rates and extended loan tenures. Currently, financing options for EVs are scarce and markedly less favorable than those for ICE vehicles. For example, EVs often come with a loan-to-value ratio that is 10%-30% lower, requiring buyers to make higher down payments. 

Moreover, the EMI burden is exacerbated by interest rates that are 1%-9% higher and loan tenures that are 6-18 months shorter compared to ICE financing. This disparity highlights a significant market challenge: traditional lending practices have yet to fully adjust to the unique risks associated with EVs, potentially stalling the broader adoption of cleaner technologies.