Dealers typically need credit to buy cars from automakers which they then sell on to customers.
The auto financing arms of Volkswagen AG and Ford Motor Co plan to stop giving new credit to car buyers and dealers in India and will exit from the country, sources aware of the development told Reuters.
Volkswagen Finance Private Ltd, the German carmaker’s finance arm, stopped giving loans to car buyers in India last year and in May told dealers of all VW brands, which includes Volkswagen, Skoda and Audi, to find other financing, two sources with direct knowledge of the talks said.
As some customers failed to make repayments, the finance unit has suffered losses, and will close for business by December 31, the sources said.
More than 50 per cent of Volkswagen group dealers use credit from the finance arm, they said.
Volkswagen Finance Private Ltd said in a statement that it had acquired a major stake in Indian loan brokerage portal KUWY Technologies to service its retail customers.
It is in talks with dealers and will review its business strategy by the end of the year, the company said.
The auto finance arms are classified as non-banking financial companies (NBFCs) and they compete with banks for providing credit. But banks have access to cheaper funding so can offer loans at lower rates than those offered by NBFCs or shadow lenders.
To offset the disadvantage, Volkswagen and Ford would offer incentives to those dealers who have used their credit finance, the sources said.
Dealers typically need credit to buy cars from automakers which they then sell on to customers.
Volkswagen’s plan to exit the financing business has surprised dealers, coming weeks ahead of the launch of Skoda’s new sport-utility vehicle (SUV) to boost sales in India, the two sources said.
Skoda dealers have been asked to find new financing by the end of the month – a tight deadline ahead of a new model launch, one source said.
Ford Credit, the automaker’s financing arm, stopped lending to car buyers at the end of last year and will cease credit to dealers by June 30, two separate sources said.
The decision to exit the financing business comes at a time when Ford is finalising a new strategy for India after ending ties with Mahindra & Mahindra on Dec. 31.
A Ford Motor India spokesperson said the company regularly assesses market conditions for its credit business and the decision to discontinue was conveyed to dealers in October – before it made any announcement on the Mahindra partnership.
“We are confident the auto financing sector in India can support Ford customer and dealer new financing needs. Our team continues to service our existing book of business,” the spokesperson said, adding that 25-30 per cent of its dealers do business with Ford Credit.