This is the first time that an NBFC is admitting to large-scale defaults in the retail car-finance segment, which was hitherto considered safe from bad loans. A senior official admitted that 90 per cent of Anagram's portfolio consisted of vehicle finance, with about 25 per cent accounted for by truck finance and the rest by car finance. Anagram had stopped truck financing and industrial leasing last year itself after many of these accounts turned bad and had been concentrating on car finance.

The situation, caused by the general slowdown in the economy which resulted in increasing defaults, wasworsened by the slump in the second-hand car market. Re-possession and resale became difficult and the company was forced to be lenient on defaulters, leaving many outstanding equal-monthly installments (EMIs). According to the stringent NPA accounting procedure for NBFCs, most of these accounts were accounted as NPAs leading to the erosion of the company's networth.

Matters worsened when some of the new car manufacturers like Daewoo slashed their sale prices, leading to defaults by even people capable of paying the installments on time. The second-hand price of a few months old Deawoo car was quoted at even less than half the outstandings to be paid to the car financier. In such instances, the owners were willing to let the financiers take re-possession than pay back the installments, said industry sources.

However, officials of other NBFCs are reluctant to buy Anagram's version completely. They say that large-scale bad loans on the retail front can happen only if the majority of the cars financed bythem are the newer models of car, which do not have a second-hand market. Nearly all major NBFCs have been concentrating exclusively on car finance since the last one and a half years following the bourgeoning NPAs in the industrial leasing business. All the top NBFCs like Kotak Mahindra, Alpic Finance, 20th Century Finance, Tata Finance and Birla Global have huge retail car-finance portfolio. NBFCs were trying to maintain growth and show a credible portfolio by creating retail assets which were known for their low default incidence. The news of Anagram's negative networth has taken everyone in the industry by surprise, including the credit-rating agencies. Crisil had assigned a double-A (AA) rating to Anagram's financial instruments.

Anagram reported negative networth all of a sudden, along with its annoucement of merger with ICICI last week. It reported a net profit of Rs 34.76 crore and a net worth of Rs 160 crore in June 1997. With the infusion of Rs 125 crore into Anagram by Lalbhais before the mergerto compensate for the erosion in networth, it may be estimated that the total erosion of networth will be in the region of Rs 250 crore.

According to an official, the drastic erosion in networth occured only during the last six to eight months. The Lalbhais were, just a few months back, talking with Marubeni and GE Caps for divesting their stake. From that position, in the present merger deal, they had to fork out Rs 125 crore apart from agreeing to a highly disadvantageous swap ratio to get rid of the NBFC business, without affecting the group prestige.