The auto industry that has been facing a hitch from the past few months has propelled carmakers to start their own finance companies to finance the new cars with the hope to boost the sales figure.

Funding is important part of the auto sales as nearly 65% to 70% of the new cars sales are backed by auto loans extended by some banks or financial institution. But lenders in the industry have withdrawn from the auto industry as a part of their preventive measures and this has suffered the auto sales to a great extent. So in order to check the falling sales figure, some European carmakers such as Daimler Motors, Skoda Auto and Volkswagen have planned to foray Rs 22,000-crore auto loan market in the country. These firms are planning to start their own finance arm with a view to increase the sales.

Volkswagen has started its wholly-owned subsidiary named Volkswagen Finance in order to extend car loans, loans for working capital and others to its dealers. A representative from Volkswagen said, "We are looking at developing our sales & service network through Volkswagen Finance. We will provide loans at affordable rates to our distribution channels to support our brands."

In the same way, Daimler is also going to start its vehicle financing arm, Daimler Financial Services in the country. The firm is targeting to knock the truck and bus segment which are priced at a higher slab and therefore more than 90% of the new sales are financed through loans.

Daimler has set up a joint venture with the Delhi-based Hero Motor India in order to make trucks and buses that will be launched by the end of 2010. Under this joint venture, Daimler will hold 60% of the stake while the remaining 40% will be held by the Hero Group.

On the other hand the Indian automakers such as Bajaj Auto, Tata Motors and M&M have already started extending loans through their own finance subsidiaries. Bajaj Auto (two-wheeler) CEO S Sridhar said: "Around 25% of our sales are being financed by BAFL. We expect this to grow and BAFL's share of total sales to double in the next six months."

The credit crunch had hit the Indian shores following which most banks and other lending institutions tightening their lending portfolio. Earlier 80% of the new cars sold in India were financed through a loan and the annual market size was about Rs 35,000 crore but with the rising interest rate and lack of liquidity, this fraction has come down. This trend has therefore affected the sales figure in the industry.

In the past few months, passenger car sales have been dropping and in December 2008, this fall was recorded at the highest level of 7%. Automakers are attributing this fall to the liquidity crunch in the industry and therefore to tide over this problem they are setting up their own finance arms.