India has 9 of the 10 most polluted cities in the world. Auto-rickshaw fleets in Indian cities on average contribute around 10% of this pollution. Also, most auto-rickshaw drivers opt to rent their vehicles instead of owning them, due to a lack of fitting financing options for ownership. This instrument aims to provide loans to drivers to enable ownership of electric auto-rickshaws, which will both reduce carbon emissions in Indian cities and enhance the livelihoods of drivers.
There are several barriers to access to debt at feasible terms for self-ownership of auto-rickshaws. These barriers include the poor credit profiles of auto-rickshaw drivers, and high collateral requirements and initial investment for existing ownership options. This instrument provides a low cost 100% debt financing option to purchase electric auto-rickshaws with a long tenor for repayments – i.e. an option for no down payment at competitive rates of interest and ownership transfer of the auto-rickshaws to the drivers within four years. This instrument has the potential to enable the financial inclusion of a large population of auto-rickshaw drivers.
An important part of the instrument is a community-based collection system that uses the elements of behavioral sciences. This collection system incentivizes timely payment by the loan borrowers. Additionally, the collection system on testing for a small off-book portfolio has shown superior performance.
The proposed instrument at scale has potential to reduce CO2 emissions equivalent to the emissions of Portugal. Once the model is successfully tested in the pilot cities, it could be replicated in other Indian cities as well in other cities in Southeast Asia and Africa that have a high density of auto-rickshaws/tuk-tuks.
The instrument proponent, Three Wheels Capital (TWC), is a Non-Banking Finance Company (its NBFC license application is in process) that will extend loans to the auto-rickshaw drivers. For the purposes of potential pipeline identification, TWC uses the TWU Foundation that works as a market maker, creating an awareness around electric auto-rickshaws and the loan product within the community of the auto-rickshaw drivers.
In order to meet the funding requirements of an NBFC, equity is infused by the holding company Three Wheels United BV into the NBFC. To meet the debt requirements and leverage the capital structure, the instrument design allows the option of both local and foreign debt infusion into the structure. The locally raised debt can be directly infused in the NBFC while for foreign debt an SPV (working as a debt funding vehicle based out of Dubai) will infuse debt capital into the local NBFC.
Three Wheels Capital has identified the cities of Bangalore and Chennai for the initial pilot project. The pilot phase is likely to be funded using equity only in absence of no operational track record. However, before the NBFC reaches a critical mass it would require concessional loans and guarantees support, to de-risk the portfolio and set an operational track record against the systematic risks. This will help to attract the commercial debt into the capital structure. Once the model reaches a critical mass the guarantee support can be tapered off.
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