EV financing: A double-edged sword for early stage investing

The global shift from Internal Combustion Engines (ICE) to Electric Vehicles (EVs) is undeniably one of the most profound transitions of this decade. In India alone, the EV sector witnessed remarkable growth, with sales reaching nearly 2 million units last year, marking a 25% year-over-year increase. This rapid adoption has simultaneously sparked a major evolution within the vehicle financing industry. India’s EV financing market, valued at approximately $2.4 billion in 2025, is anticipated to expand dramatically at a Compound Annual Growth Rate (CAGR) of 53%, reaching around $19.9 billion by 2030. This explosive growth has largely been fuelled by supportive government policies, increasing environmental awareness, favourable long-term economics compared to ICE vehicles, and advancements in technological infrastructure.

Initially, when the demand for EV financing was growing, the essential question that lenders had to deal with was: how to underwrite a new asset type when residual value of the EV and its battery was uncertain. Gradually, several incumbents and new-entrants started entering the market.

If you look at the type of EV and its segmentation – 53% of EV sales comes from 2 wheelers and 42% comes from three wheelers including both passenger and cargo and just a mere 5% from four wheelers (majorly passenger cars followed by commercial vehicles like buses). Financers are choosing to cater to either one or several of these categories. Furthermore, there are players catering to the finance requirements of not just EV buyers but OEMs, battery infra providers and fleet operators.

The opportunity within EV financing is undeniably real, tangible, and substantial. However, it raises a critical question for the investment community: will this burgeoning market be primarily captured by established incumbents leveraging their existing infrastructure and customer base, or can innovative new entrants successfully carve out a significant market share?

Historically, new entrants often thrived in lending by adopting a ​“disruptive innovation” playbook, focusing on underserved geographies, customer segments, or niches neglected by incumbents. However, the case of EV financing presents a unique scenario, representing a foreseeable and significant shift impacting an entire category. This poses distinct challenges for new entrants:

Challenges for New Entrants in EV Financing

1. Inability to rapidly scale and achieve cost advantage: Typically, new lending businesses gain traction when incumbents hesitate to enter a new space due to perceived small market size or underwriting complexity. This allows new entrants time to build their loan book and secure low-cost debt capital before facing incumbent competition. In EV financing, this dynamic is altered. The market shift is significant and attracts widespread attention from established players from the outset. Consequently, new entrants have a shorter runway to achieve the scale necessary to attract low-cost capital before incumbents fully engage.
2. Market rationing and structural constraints: Underwriting EV assets remains an evolving challenge. Accurately modeling battery depreciation is difficult, compounded by the lack of a mature second-hand battery market. This uncertainty can lead to a market structure where lenders diversify risk by working with multiple OEMs, and OEMs, in turn, partner with various lenders. This can result in a ​“rationed” market, limiting any single financier’s ability to gain substantial market share or scale non-linearly.
3. Capital intensity: Similar to established sectors like housing or MSME finance, EV lending requires continuous equity capital infusion as the loan book expands to maintain regulatory debt-to-equity (D/E) ratios. This high capital requirement can be unattractive from an Internal Rate of Return (IRR) perspective, particularly at the seed stage of investment.

Due to these challenges, new entrants to EV financing in India do face a structural disadvantage compared to incumbent lenders entering the market. However, despite these obstacles, new players can still compete effectively if they are able to adopt the following strategies:

• Capital-Light, Scalable Models: To compete with incumbents that benefit from lower capital costs, new players must adopt differentiated, capital-light models. One effective approach is to forge co-lending partnerships with banks or larger NBFCs, thereby leveraging their balance sheets without taking on disproportionate risk. Another is to design innovative financing structures such as Battery-as-a-Service (BaaS) or subscription-based models. These models help reduce capital intensity while expanding access to financing. BaaS, in particular, separates the cost of the battery from the vehicle. Customers purchase the EV without the battery and instead pay a recurring subscription fee for battery usage. Since the battery constitutes a significant portion of the EV’s total cost, this model can reduce upfront expenses by as much as 40%, making EV ownership more accessible, especially for price-sensitive consumers.
• Differentiated Distribution Strategies: A non-linear distribution model can also serve as a powerful differentiator. Instead of operating as standalone lenders, new entrants can embed financing within the EV purchase experience, turning it into a seamless and integrated offering. Some players are even combining dealership operations with financing, enabling them to capture both dealer margins and financing profits. This vertically integrated approach not only boosts profitability but also strengthens customer relationships through a more holistic service offering.
• Access to Low-Cost Capital: Access to affordable capital remains critical for any player entering the EV financing space. New entrants can tap into various government incentives and subsidies designed to promote clean mobility. Green bonds, which are increasingly being used to fund sustainable projects, present another compelling option. Additionally, initiatives like SIDBI’s Mission 50K-EV4ECO provide refinancing support to NBFCs, helping them reduce their cost of funds. Development Finance Institutions (DFIs) and first-loss guarantee mechanisms can also play a key role in lowering the effective cost of capital while diversifying funding sources.

Lastly, perhaps the most crucial element is the ability to underwrite EV-specific risks better than incumbents. This requires specialized understanding of battery performance, usage patterns, depreciation, and residual value estimation. Given the nascent nature of the market, such underwriting sophistication is vital to accurately assess credit risk, structure viable products, and build a high-quality portfolio.

Conclusion

EV financing in India is not an easy market to crack, but it presents a unique opportunity for those willing to innovate across capital structure, distribution, and underwriting. With the right mix of financial ingenuity and operational execution, new entrants can build sustainable, profitable businesses despite the odds.

EV Financing Market Landscape: