Mint Explainer: How India's high bank guarantees became speed bumps for foreign EV makers
India's ambitious push for electric vehicles faces challenges due to stringent bank guarantee criteria for foreign manufacturers. With significant investments from local companies and a focus on zero-emission transportation, the stakes are high.
New Delhi: India's policy for making and adopting electric vehicles (EVs) is packed with incentives for manufacturers and consumers. Yet, the government's scheme to attract foreign automakers to make EVs in India with a massive import duty cut on completely built-up cars has seen zero takers.
One reason for this is the high bank guarantee criteria in the scheme. Original equipment automakers are required to pay a bank guarantee of at least ₹4,150 crore, or equal to the amount of import duty foregone.
Though bank guarantees are a crucial public policy tool, this condition has turned into a speed bump too steep to cross. Mint explains how bank guarantees nudge stakeholders in India's ambitious EV drive.
What exactly is a bank guarantee?
Take two parties, A and B, who want to enter into an agreement. A is not sure if B can deliver on the targets, so A asks for a bank guarantee from B to protect its own interests.
In a bank guarantee, B deposits a sum of money into a bank, which is then invoked if B does not meet the agreed-upon criteria.
There are different types of bank guarantees. For instance, a performance bank guarantee is invoked when a party fails to deliver the agreed-upon items. It covers delays in delivery, or any other hindrance that might have kept the party from completing deliverables.
Similarly, a financial bank guarantee is invoked when one of the parties fails to repay loans or any other financial obligations.
While bank guarantees are used for various purposes across sectors, the broad structure remains the same.
How are bank guarantees used in India’s EV policy?
The government’s scheme to promote the manufacturing of Indian passenger cars aims to invite foreign EV makers to make electric cars in India using local supply chains. EV makers that invest at least ₹4,150 crore in a new factory or a new manufacturing line for EVs will get to import as many as 8,000 electric cars every year for five years at an import duty of 15%, a sharp cut from the 70-110% levy.
To be clear, the scheme applies only to companies with group revenue of upwards of ₹10,000 crore and fixed asset investments of over ₹3,000 crore.
However, EV makers also have to create a bank guarantee worth ₹4,150 crore (the minimum investment requirement under the scheme) or equivalent to the amount of import duty foregone for the company throughout the scheme's tenure, whichever is higher.
This bank guarantee will be forfeited if the company does not meet the targets of the scheme. These targets include a 25% localization in three years, and 50% in five years, as well as a localized product rollout within three years of starting operations.
The scheme has not seen traction as of date. It was first announced in March 2024, and its rules and guidelines were notified in June this year. To date, no company has invested in India under the scheme.
While bank guarantees were put in place to ensure that fly-by-night operators do not reap benefits, the scheme has seen lacklustre performance to date, despite a handful of foreign automakers starting operations in India. For instance, Vietnamese EV maker VinFast opened a new manufacturing facility in Tamil Nadu, but has not been a part of the scheme.
"High bank guarantees are one of the key criteria to ensure that serious players participate and there is a high chance of interested entities actually investing in manufacturing EVs in India," said Sharif Qamar, associate director of transport and mobility at The Energy and Resources Institute (Teri).
Should we do away with bank guarantees as a tool?
No. Bank guarantees have also nudged stakeholders in the right direction, inside India’s EV policy. Take the country’s electric bus ecosystem, where bank guarantees play a crucial part in reducing trust deficit.
In India, buses are procured by governments or public transport authorities, and may be operated by a third party. In October 2024, the government implemented the PM-eBus Sewa-Payment Security Mechanism (PSM), creating bank guarantees to ensure timely payments to bus operators and manufacturers by public transport authorities.
To be clear, the public transport authority which wants to procure electric buses has to get a direct debit mandate (DDM) certificate from the Reserve Bank of India after creating a payment security mechanism. This acts as a safety net for bus makers and operators, who have complained of unpaid dues in the past.
The country’s largest e-bus tender for 10,900 units was floated by Convergence Energy Services Ltd (CESL) under the government’s marquee PM Electric Drive Revolution in Innovative Vehicle Enhancement (e-DRIVE) scheme. The number of manufacturers and operators of e-buses has also increased, with both veteran automakers and new-age companies investing in zero-emission public transportation.
Bank guarantees form a crucial part of public policy, and have played a key role in the country’s policy on electric vehicles.
The government has planned to spend ₹10,900 crore on demand-side incentives for consumers to buy EVs till FY28, as well as a ₹25,938-crore production-linked incentive (PLI) scheme for EVs and other zero-emission vehicles till FY29.
While the scheme to attract foreign EV makers has seen no progress, homegrown EV makers have invested about ₹29,500 crore into the sector under the PLI scheme for EVs, and created more than 45,000 new jobs, union heavy industries and steel minister H.D. Kumaraswamy had said recently.
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