Themes: Merger and acquisition takeover
Period : 1991 - 1996
Organization : ITC Classic, ICICI
Pub Date : 2002
Countries : India
Industry : Financial Services
Classic also had a huge asset-liability mismatch. Its asset-financing portfolio was functioning fine till September 1995, when due to a liquidity crunch it had to miss on installment repayments. Eventually, the volume of overdue payments reached as high as Rs 300 crore. A Classic executive said,
"Most of our assets are wholesale in nature while our liabilities are retail.
When the market got gripped by a panic, all wanted their funds, but we cannot
make our assets liquid at such short notice."
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The credit rating agency, Credit Rating Information Serviced Ltd. (CRISIL) downgraded Classic's rating for its fixed deposit scheme and non-convertible debentures from AA to A+ and from FAA+ to FAA-, respectively in June 1996 and further to A- and FA, respectively in December 1996. An internal CRISIL note revealed some other important issues that had led to Classic's demise. The note stated: "Although the company's asset portfolio remained fairly well-diversified in terms of the client base/industry spread, the high growth rate, and the inherent risk in corporate plant and machinery financing had an adverse impact on the company's asset quality, resulting in difficulty in timely recovery of dues from a number of clients." The note further criticized Classic's exposure to the corporate asset financing business in general, and to the machinery segment in particular, which was inherently deemed to be risky.
Classic was also reported to have made a tactical error by shifting its focus from its primary business of hire purchase and leasing to secondary market operations. The company was blamed to have entered the latter arena to 'get rich quick' by stock market deals, besides to spread the risk associated with asset financing. In 1995-96, a former Classic director said, "Only about 55% of Classic's business was in hire purchase and leasing, while the rest was in stock market operations."