India's electric vehicle (EV) market continues to grow with new registrations crossing nearly 2 million units in FY25. However, adoption in Tier II and Tier III cities remains relatively low, at around 10% as of May 2025, according to Sanket Kothari, head of policy and risk at Ecofy, a firm that offers financial solutions for the electric vehicle, solar, and SME sectors.

"A major challenge is the large proportion of the informal economy relative to the formal economy in these markets, making traditional underwriting models ineffective, which in turn leads to low financial penetration," Kothari explains.

Banks lending to non-banking financial companies (NBFCs) play a key role in financing segments such as EV. However, the segment fell 0.3% year-on-year in May 2025 to ₹15.63 lakh crore, reversing the sharp 16% growth seen in May last year, according to RBI data. Excluding housing finance companies and public financial institutions, growth slowed from 7.2% in April to just 3.6% in May 2025.

Overall, bank credit to NBFCs in April increased by only 2.9% yoy. However, the RBI in April eased capital requirements by restoring risk weights on bank loans to NBFCs to levels linked to their external credit ratings. Nevertheless, lending to higher-risk segments, such as microfinance and unsecured credit, continues to attract heavier capital charges, keeping banks cautious.

This raises a pressing question: Can the financial system deliver adequate, affordable credit to power India’s green mobility goals? "EV sales will be skyrocketing in the next couple of years. It is crucial to address the financial weakness through regulatory reform, capital stacks, and credit guarantees. Promising moves like Priority Sector Lending (PSL), tailored NBFC fintech models, and secure e-bus lending structures can provide a strong capital flow and investor confidence," says Raj Khosla, founder & MD, MyMoneyMantra.com.

Kothari adds, "The need of the hour is to expand the underwriting methodology, taking into cognisance the target segment. Although overall demand is higher, a significant financing gap remains. While electric two-wheelers dominated the Indian EV market with roughly 1.2 million units sold in India, there is still limited documentation of incomes and credit histories. Hence, there is a lack of credit flow precisely in the space where EV adoption can be scaled the fastest."

Generally, banks face challenges in financing EVs, especially for two and three-wheelers, due to the customer profile (economically weaker sections, lack of credit history) and the fact that EV financing isn't currently classified as priority sector lending. NBFCs are crucial in providing financing to buyers, particularly for two and three-wheeler EVs, who may not have access to traditional bank financing because they don't have a credit history.

How to bridge the gap

Kothari says the solution lies in building strong, innovative, data-led credit models for customers in these markets. Leveraging local intelligence, non-income-based credit scores, and vehicle telematics to create a rich credit profile for underserved customers is crucial in helping to bridge the financing gap while maintaining asset quality. "Simultaneously, building a robust EV financing ecosystem will also require coordinated action from manufacturers, financiers, and policymakers to establish residual value frameworks and enhance resale activities in the market for EVs; thus, reducing the perceived risk for the financing body," Kothari adds.

If India wants to match its EV financing capacity with its rapidly increasing demand, especially in Tier II and III markets, it will require a credit mix, targeted policies, and risk-sharing mechanisms. "There is a need to bring more players into the lending game, create financial products that match rural and small-town realities, de-risk lending for banks and NBFCs, and strengthen local financing channels in Tier II, III cities," said Khosla.