Banks are going slow on vehicle loans, and loans to vehicles, vehicle parts and transport equipment industries, according to the Reserve Bank of India (RBI) data on sectoral credit deployment of banks’ credit. The risk aversion is largely on account of higher delinquencies, uncertain re-sale value in the electric vehicle (EV) segment, and demand slowdown, bankers say.

Dhiraj Agrawal, CBO of Mufin Green Finance, says lenders are cautious about EV and vehicle loans due to key structural challenges. “Unlike ICE vehicles, EVs—especially 2- and 3-wheelers—have uncertain resale value; for example, the Tata Nexon EV depreciated 26 per cent in 2023, nearly twice as fast as petrol versions. Poor after-sales service is a major risk—Ola Electric alone saw over 10,000 complaints in a year,” he said.

“Entry-level EV segments have reported NPA levels rising from 7.7 per cent to 11.8 per cent (FY20–22), mainly due to low-quality products and informal lending. Many buyers have no formal credit history, making underwriting difficult. With increased RBI scrutiny on asset quality, lenders are prioritising safer lending. The hesitation isn’t about the EV story—it’s about the need for a more reliable, mature ecosystem,” he added.

According to the RBI’s latest sectoral credit deployment data, banks’ vehicle loan exposure rose at a slower 9 per cent annual rate to ₹6.29 lakh crore as on April 18, compared to the 17 per cent growth in the same period last year. The growth rate in banks loans to vehicles, vehicle parts and transport equipment industries was flat, up 7 per cent on-year at ₹1.19 lakh crore in April.

C S Vigneshwar, President of Federation of Automobile Dealers Associations (FADA) says, “We have seen banks and financial institutions become extremely cautious with who they want to give vehicle loans, increase the documentation required for vehicle loans and tighten norms through previous quarters. The reasons could be the economy was doing less than expected. However, now with the drop in interest rates and the stock markets doing well, we are anticipating the norms imposed by financial institutions and banks to ease over time.”

Spillover risks

A recent note by Macquarie Research, citing CRIF Highmark data, said that the micro loan stress has percolated to other categories like auto loans, business loans, where they have seen a pickup in delinquencies and stressed loan book.

“Stress in the micro loan segment has led banks to be cautious about similar low-ticket sized loans, whether it be secured or unsecured loans. Lenders are going slow on vehicle loans, affordable home loans and single owner commercial vehicle loans. Two-wheeler loans come just below micro loans in terms of repayment risk,” a senior banker said.

“About 40 per cent of two-wheeler loans are new to credit customers which makes underwriting difficult. There has been a slowdown in auto sector, with higher delinquencies being seen in the commercial vehicle segment,” he added.

The current crunch in rare earth magnets, which are critical for manufacturing EV and hybrid vehicles, could also impact the auto dealers’ working capital lines with lenders, experts say.

Vivek Iyer, Partner and Financial Services Risk Leader, Grant Thornton Bharat said, “The rare earth material export ban by China is largely an auto industry challenge, which will have a margin implication for auto dealers as they may not want to pass on the higher prices to end customers given the competitive environment. Impact on the working capital lines for auto industry would need to be evaluated by banks.”

Published on June 15, 2025