Bridging the Gap: Innovative Loan Models to Boost EV Penetration in Tier 2/3 Cities

By moving away from rigid, legacy banking norms and embracing genuinely innovative models—whether it is underwriting based on a borrower's "intent" rather than their "history" or financing "kilometres" rather than "batteries"—India is creating a blueprint for the world.

December 24, 2025. By News Bureau

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Nehal Gupta

Accelerated Money For U

Innovative Loan Models

Sustainable transport

Electric Vehicles

EV Loans

The electric vehicle (EV) revolution in India is experiencing a remarkable shift. While early adoption was mainly concentrated in major cities such as Delhi and Bengaluru, the next significant surge of growth is evidently rising from the nation’s Tier 2 and Tier 3 cities. Locations such as Patna, Jaipur, Lucknow, and Indore are now seeing impressive EV penetration rates, especially in the more accessible two-wheeler and three-wheeler categories. However, this crucial demographic shift has revealed one of the biggest flaws in the current ecosystem, and that, unfortunately, is a considerable financing gap. Traditional lending practices, which rely on established credit histories and strict asset assessments, often do not meet the needs of potential EV owners in semi-urban areas. To genuinely tap into the potential of "Bharat", a new generation of fintech innovators and non-banking financial companies (NBFCs) is actively changing the landscape of credit with creative loan models designed specifically for these smaller markets.

The Credit Conundrum in Semi-Urban India

In Tier 2 and Tier 3 cities, potential electric vehicle (EV) buyers are often gig workers, small traders, or micro-entrepreneurs. Unlike those in larger cities, these individuals usually lack a formal CIBIL score or sufficient documented income proof. Traditional banks, being naturally cautious, tend to view this group with considerable skepticism. They encounter two primary issues. The first issue is a "borrower risk" due to the absence of a reliable credit history. Then comes "asset risk" related to the uncertainty of future resale values and the battery life of the EVs. Consequently, buyers in these regions have historically faced high rejection rates or have been subjected to excessively high interest rates. The ongoing credit crunch greatly limits demand, even though the Total Cost of Ownership (TCO) for an EV is often much lower than that of a vehicle with an Internal Combustion Engine (ICE). Addressing this issue requires not only an influx of capital but also a complete reassessment of financial risk evaluation and asset financing.

Fintech-Led Underwriting: Looking Beyond the Credit Score

The most significant innovation helping to bridge this financing gap is the crucial shift from document-based underwriting to data-based "intent" assessment. Fintech players are pioneering the use of alternative, non-traditional data to effectively assess a borrower’s creditworthiness. One fintech platform has carved a successful niche in financing electric three-wheelers in even smaller Tier 3 and Tier 4 towns. Recognising that their target customer often has little to no digital footprint, this platform utilises "psychometric testing" and biometrics as a core part of their underwriting process. By analysing a borrower’s behavioural traits and their demonstrated intent to repay via a gamified digital application, the company can approve loans in under 20 minutes for customers who would be instantly rejected by a traditional bank. This "high-tech, low-touch" model allows them to serve deep rural pockets where physical bank branches are scarce, effectively democratising access to credit. Another approach that businesses are now utilising is a "driver-focused" credit scoring system. They smartly merge behavioral data with predictive analytics to evaluate the potential future earnings of the driver. Their creative model significantly reduces the obstacles to obtaining income-generating EVs in smaller communities.

Asset De-coupling: Battery-as-a-Service (BaaS) Financing

One of the steepest hurdles for EV adoption in cost-sensitive markets is the high upfront cost, driven largely by the battery, which can constitute 40–50 percent of the vehicle’s price. Innovative financing is now tackling this head-on by physically decoupling the battery from the rest of the vehicle. A company has introduced a pioneering "battery subscription" model. In this arrangement, the customer takes a loan only for the vehicle chassis, which significantly lowers both the required down payment and the monthly EMIs. The battery is then offered as a service, where the user pays a variable "subscription fee" based on the kilometres driven. This pay-per-use model is transformative for Tier 2/3 cities because it expertly aligns the cost with the user's actual earnings—meaning if a driver earns less in a particular month, their battery cost is proportionally lower. Furthermore, by retaining ownership of the battery, the company assumes the "battery anxiety" risk, offering a lifetime warranty and replacement, which is a massive confidence booster for first-time EV buyers in smaller towns.

Lifecycle Financing and Buyback Guarantees

In smaller towns, the vehicle is often the owner's primary working asset. The fear of plummeting resale value (due to second-hand market uncertainty) deters many from making the switch to electric. To counter this, innovators are bundling financing with "assured buyback" guarantees. A commercial EV marketplace focuses heavily on the Total Cost of Ownership (TCO). They don't just sell a vehicle; they provide a complete lifecycle solution. By guaranteeing a buyback value after a specified duration (like three years), they effectively limit the asset risk for the buyer. This transparency allows a driver in towns such as Mysore or Nashik to precisely determine their savings and earnings throughout the vehicle's lifespan, transforming the financial decision into a straightforward mathematical calculation instead of a gamble. This approach is vital for commercial three-wheelers, which serve as the fundamental backbone of last-mile logistics in semi-urban India.

The "Phygital" Approach and Co-Lending Partnerships

While digital tools are essential for efficiency, the "human touch" remains vital in Tier 2/3 markets. One NBFC has successfully adopted a "phygital" (physical + digital) strategy. They effectively merge fast digital onboarding with local collaborations—partnering with dealers, EV fleet operators, and key community leaders—to nurture trust and comprehension in their markets. To scale these innovations, "Co-Lending" has emerged as a powerful regulatory framework. In this model, the agile NBFC or fintech creates the loan with its own underwriting, while a major bank supplies most of the funding at a much lower cost. This partnership allows the lower interest rates typically offered by big banks to reach the deep distribution networks established by these financiers. For instance, major public sector banks are now partnering with agile EV financiers to meet their Priority Sector Lending (PSL) targets, effectively channelling institutional capital into the streets of rural India.

In conclusion, the electrification of India’s Tier 2 and Tier 3 cities is not merely a technological transition; it is fundamentally a financial inclusion story. By moving away from rigid, legacy banking norms and embracing genuinely innovative models—whether it is underwriting based on a borrower's "intent" rather than their "history" or financing "kilometres" rather than "batteries"—India is creating a blueprint for the world. These innovative loan models are doing far more than just selling vehicles; they are actively empowering a new generation of micro-entrepreneurs in small-town India to own their economic future, one electric kilometre at a time. As these models mature and begin to merge with mainstream banking, the gap between aspiration and affordability will finally close, driving the true mass adoption of electric mobility across Bharat.

- Nehal Gupta, Founder and MD, Accelerated Money For U (AMU)