Financing electric mobility: Evaluating BaaS structures

  • Qasim Saif |

The penetration of EVs in Indian vehicle market have gone up from 0.01% to 1.66% from FY 15 to September, 2021[1]. However, the growth of EVs faces several resistances in form of high upfront cost, the lack of public charging infrastructure, and travel range. In order to catapult the growth of EVs in India, there is need to increase infrastructural support to the industry in the form of charging stations, battery units etc.

The dire need of financing is felt in the entire supply chain of EVs beginning from the speciality chemicals used in batteries to the finished vehicle purchased by the end user.

If the demand side of the EVs is able to perform well this shall help the entire asset value chain to assimilate the required resources. Hence, ease of acquisition of asset, would act as a catalyst or rather a jet boost for the development of the entire EV supply chain. Enabling as well as financing the acquisition of EV asset by the end customer hence becomes a rather pivotal point for entire eco-system.

Leasing can be one of the mode of financing, and this article, we wish to discuss the prospects of leasing as a mode of finance for EVs in India.

EV segment in India

The most important drivers of the demand of EVs in India can be:

  1. Rapidly developing, Indian middle-class
  2. Increasing cost of petroleum products
  3. Growing sentiments for pollution control
  4. Promotion of social distancing

As the vehicle demand and the penetration of EVs both increase in India, this presents an opportunity to cater to this market. Even for the economy at large, this is an opportunity to drive significant growth in a new sector.

Increased EV adoption is likely to present an unprecedented opportunity for multiple market players, from battery manufacturers to commercial electric vehicle operators. Investments in EV segment could be an important driver for India’s post-COVID economic recovery, generating jobs and economic value and export promotion, across the value chain including in existing industries and through the creation of new sectors.

The distribution of EVs in India shows that the majority of the EV segment is dominated by the 2-wheeled vehicles, the trends are as follows:


One of the easiest ways to bridge the gap in upfront cost of the traditional vehicles and EVs is to improve the availability of finance for EVs, especially for fleets like 2-wheelers and 3-wheelers where adoption of EVs is financially more lucrative due to the accelerated recovery of costs.

Current and potential consumers of EVs see its higher upfront cost at present as a major barrier to its adoption. The overall investment opportunity that EVs present is akin to the amount of capital the end consumers will spend on the transition. Thus, access to consumer finance is a critical factor for the adoption of EVs due to the high upfront costs of EVs at present as compared to conventional vehicles and for building up EV infrastructure.

For some categories like car fleets, initial purchase cost hurdle seems to have been mitigated with improved availability of finance, where barriers like the availability of public charging stations do not majorly impact their adoption as they have private charging and optimised routes. High daily usage, as in the case of fleet operations, make EVs competitive or even cheaper than traditional vehicles owing to their low operating costs, including limited maintenance requirements.

Limitations of traditional financing sources for EVs

Moving to an e-mobility future will be a massive exercise that will require significant investment into the sector. Raising capital to finance OEMs, battery manufacturers, charging stations, and end consumers will require systemic policy support and shifts in market design, business models, and financial structuring. Together, these will have to address the barriers that hinder the growth of the sector and in turn channelise the flow of capital into the sector.

The lack of a performance track record is a significant barrier for financing the end-consumer. Financing for commercial vehicles like fleets takes place based on loan coverage ratios, which are dependent on the actual cash flows from operations. The continuous and rapid decline in the market value (due to decline in value of battery) of EVs acts as a barrier to financing, as the value of loan outstanding at any time may exceed the value of the vehicle being financed; this is likely to limit the possibility of financing via traditional methods. The barrier, when combined with the comparatively high purchase cost of EVs at present, can present a big challenge for financiers and thus may severely limit the penetration of EVs in the short term. These barriers, along with the low density of EVs in the market during the initial years, will make it difficult to assess the resale value of EVs. However, as seen with other products with a rapid declining price curve, the secondary market is small and unlucrative, making debt financing risky.

To address the additional risk in the segment the Niti Ayog and the World bank have jointly proposed setting up of a USD 300 million fund for first loss risk sharing instrument which would have State Bank of India as its program manager.

Further, as the time taken for charging of EVs pose a significant operational barrier for the user, along with ready availability of infrastructure, the industry has been increasing pushing for battery swap models. Under this the battery of the vehicle may be swaped at charging station for a charged one, however, in case of 2-wheeler the battery depreciates at a very high rate. Hence, in case the owner of the vehicle uses any such service, the determination of market value of the asset becomes impossible without a physical inspection. Also conducting a physical inspection of all vehicles financed is in itself a near to impossible task. The arrangement significantly increases the risk of financer acting as a restriction to financing the end user.

BaaS structures a probable solution?

As mentioned above, financing the acquisition of EV asset by the end customer is a pivotal point for development of entire eco-system. For the reasons mentioned the traditional sources find it difficult to adapt for the very different needs of the EV segment. The volatility of the market value along with lack of data for EVs further worsen the situation.

Further, the end customers have their sceptics for the, maintenance and life of battery. The people have reservations that at the end of the life of battery, they might have to shell out a prominent sum to get them replaced. Further, any issues in battery may also pose challenges due to lack of available facilities. Lack of charging facilities add to such concerns.

On the cursory analysis it may appear that adopting leasing as a solution for financing of the EVs, may again face the same challenges as in case of traditional loans. Rather, inability to determine the fair value of the asset after a given time may be a bigger challenge in leasing rather than in loans.

To better understand that how leasing can assist in overcoming the shortcoming of traditional financing, it shall be noted that in EV are very different than fossil fuel-based vehicles in the sense that battery and the vehicle can be treated as two separate assets. The life of vehicle and the battery differ significantly, and batteries may be severable from the vehicle. Top of all the manufacture of battery and vehicle parts are different which is in contrast to the fossil-fuel based vehciles.

The differential treatment of vehicle and battery can assist in servitisation of asset. This enables us to explore structures where battery is provided as a service whereas the vehicle as goods. Also, the two major concerns that is the higher upfront cost and maintenance of battery both can be addressed by servitising the battery.

The model of providing battery as services is referred to as BaaS.

Understanding servitisation of asset

In brief, servitisation refers to a transaction where an asset is provided by the manufacturer for use of the acquirer, ownership of the asset remains with the borrower. Say, a car manufacturer provides you an option to rent a car for a specified period, all the expenses of running and maintaining the car are taken care of by the manufacturer. In case any issues in car you may also have an option to get the car replaced. Here, there was no sale of asset, rather an asset was used to provide a service. This concept is popularly known as servitisation of asset.

In 1962, Rolls Royce, pioneered a concept – the idea of selling products as a service by offering power-by-the-hour for jet engine maintenance management. Over the years, the idea was well adopted by the industry and there was a shift in the global manufacturing. With decreasing product differentiation, escalating customer expectations, and evolving environmental and safety regulations providing further thrust for its development.

The servitisation is seeing a far better growth compared to the traditional sectors. The subscription economy index shows that service industry has grown five to eight times faster than traditional businesses. The rapidly growing service industry along with growing penetration of EVs put forward a rather ripe opportunity for vehicle financing companies to invest in.

[Our write-up explaining servitisation in detail can be accessed here]


India is a rare economy that leap-frogged the traditional model of economic evolution – from reliance on primary sector to one derived from reliance on the tertiary sector, this makes for a fertile ground for manufacturers to emulate this business model, given the dominance of services sector in Indian economy in terms of its contribution to the GDP.

That being said, what makes the case for servitization of manufacturing even more compelling is the onset of Covid-19 in the country and the consequent change in consumer behaviour in the country. Customers, have become sceptical about making discretionary purchases as they see their income shrinking. A way to re-establish customer trust for organizations is to adopt policies and processes that establish strong trust among employees, customers, partners and the community. Companies that can provide extremely high levels of service may win out over brands that cannot.

This is where servitization can step in and help bridge this trust deficit, while capitalizing on India’s strength in services sector.

At a time when consumers have ease of comparison and multiple options available readily, this model assures that the item they are purchasing will be well maintained and run as expected, for as long as expected, even if that means paying an incremental amount for service. Not only is servitization of manufacturing beneficial for the consumer since it is built on the foundation of trust and forging client relationship, it is also beneficial for manufacturers since the customer will continue to buy from the manufacturer. This will create a sustainable revenue source with the potential for growth for the asset providers.

Servitisation in case of EVs

The two models for servitisation of EVs can be to either opt for providing the EV itself as a service, that is to say that the vehicle is provided on a subscription basis. This model is currently being implemented for fossil-fuel based vehicles and the same companies have also been offering EVs under the same structure. [Our write-up on servitisation of vehicles can be accessed here.]

The above-mentioned model has nothing different for EVs. These models again pose challenges for the service providers because as mentioned above the life of battery and the vehicle differ significantly, the maintained requirement is also fulfilled at different facilities by use of different resources.

Hence, an interesting structure to evaluate would be where battery and the vehicle are treated as separate asset and accordingly acquired. Say, the battery is acquired as a service whereas the vehicle may be purchased by upfront payment or financed by service provider or a partner financier.

Understanding the model

Under the model the key function is performed by the service provider, whereby service provider purchases a vehicle and disintegrates the same into battery and the vehicle as two separate assets. It shall be pertinent to note that, the said disintegration is not by the manner of physical removal of battery rather, a legal disassociation. Whereby, the legal transfer of asset is undertaken separately though physically the asset is delivered as a single asset. Under GST, separate invoicing shall be issued for battery and the vehicle.

Legal permissibility of the structure

The Ministry of Road Transport and Highways has allowed registration of electric vehicles without pre-fitted batteries. In a letter to Transport Secretaries of all the States and UTs, the ministry has clarified that vehicles without batteries can be sold and registered based on the type approval certificate issued by the Test Agency. Further, that there is no need to specify the Make/Type or any other details of the Battery for the purpose of Registration. However, the prototype of the electrical vehicle, and the battery (regular battery or the swappable battery) is required to be type approved by the test Agencies specified under Rule 126 of the Central Motor Vehicles Rules, 1989.[2]

Though, there is clear permissibility in case of 2 and 3 wheelers the situation for cars and other vehicles still remains in a grey area.

Benefits of structure

As batteries form a major part of cost of electric vehicles, the BaaS structure shall result in significantly lower upfront cost to the customer and hence may result in wider adoption of EVs

Further, the structure enables the service provider to separately provide for the asset and accordingly, the maintenance can be taken care of by separate service provider, say battery manufacturer services all the batteries and the vehicle manufacturer services the vehicle.

The service provider may also provide an option whereby the battery, may be swapped in case of any defects or issues in the working of the batteries. The above options, can address the concerns of the end-user to a great extent.

Shortcomings of the structure

Though the model may help mitigate few of the major concerns of the EV segment, however, the model still has few leak points that needs to be addressed:

  • Legal permissibility – Though Ministry of Road Transport and Highways have explicitly permitted sale of 2 and 3-wheeler EV without batteries, however sale of cars and goods vehicle still remain a grey area.

Though it shall be noted that in the model provided above, the service provider purchases the vehicle along with the battery. Once the service provider further transfers the assets, we do not find any legal challenge in this transfer, though, the complete clarity in this regard is still absent.

  • GST – GST can result in a factor that increases the cost of acquisition of vehicle in this structure, as the GST on Electric vehicle is 5% and GST on battery is 18%. Accordingly, if the battery is supply fitted in the vehicle the entire vehicle would be subject to GST of 5% but if the battery is disintegrated as a separate asset, the battery would be subject to 18% GST. This shall result in additional cost burden on the EV buyer
  • Subsidy Schemes: Government of India and various state governments provide a subsidy benefit buyer of EVs, However, would the service provider not being the end-user of the vehicle be eligible to claim the subsidy benefit is not clearly articulated in the scheme.


The higher upfront cost results in a barrier to the growth of EVs. A major part of the cost of EVs in the form of battery cost. Enabling the acquisition of EVs by the end user without shelling out a higher price can help in development of the entire EV supply chain. Further, economic life of batteries and vehicle differ significantly as the manufacturing and maintenance of batteries are undertaken by entities, different from the vehicle manufacturers. These factors limit the availability of traditional financing sources, hence, the structures where batteries and asset are transferred as two separate assets can be of high relevance for the development of EV segment in this nascent stage.

[1] Refer graph below


0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *