Over five years since it took effect, the Insolvency and Bankruptcy Code (IBC) has helped recover ~Rs 2.5 lakh crore¹, or around one-third of the admitted financial claims from insolvent firms, marking a significant shift in the insolvency resolution process and credit culture in India.

A closer look at the data shows, however, the recovery rate and resolution timelines have a lot more room for improvement. This makes a continuous strengthening of the Code and stabilisation of the overall ecosystem imperative.

Says Gurpreet Chhatwal, Managing Director, CRISIL Ratings Ltd, “The recent resolution of a large financial services firm with a recovery of ~Rs 37,000 crore against admitted financial claim of ~Rs 87,000 crore, translating to a recovery rate of ~43%, underscores the efficacy of IBC. The resolution value was ~1.4 times the liquidation value.”

Indeed, while the IBC has tilted the power equation in favour of creditors from debtors and helped strengthen India’s insolvency resolution ecosystem, its performance against its twin objectives – maximisation of recovery and time-bound resolution – has been a mixed bag.

One, only a few large cases have seen higher recovery. Excluding the top 15 cases (by resolution value) from the 396 resolved cases, the recovery rate halves to 18% (refer to Chart 2 in Annexure).

Two, average resolution time for the aforementioned resolved cases is 419 days compared with the stipulated maximum of 330 days. About 75% of outstanding cases have already been pending for more than 270 days.

Says Nitesh Jain, Director, CRISIL Ratings Ltd, “Besides low recovery rate and longer timeframe, a key challenge is the high number of cases going to liquidation. As of June 30, 2021, nearly one-third of the 4,541 admitted cases had gone into liquidation (refer to Chart 1 in Annexure), with a recovery rate estimated at merely 5%. That said, around three-fourths of these cases were either sick or defunct. With closure of these vintage cases, recovery rate as well as timelines are expected to improve.”

Notwithstanding these challenges, the IBC has played a key role in resolution of stressed assets so far. Its effectiveness will continue to be tested given the elevated level of stressed assets² in the Indian financial system. In this milieu, the government has been proactive in addressing issues being faced by various stakeholders. In August this year, the Standing Committee on Finance made recommendations to reinforce the IBC and the associated ecosystem. The critical recommendations include: 1) developing specialised National Company Law Tribunal (NCLT) benches to hear only IBC matters; 2) establishing professional code of conduct for committee of creditors (CoC); 3) strengthening the role of resolution professionals; and 4) digitalising IBC platforms in order to make the resolution process faster and maximise the realisable value of assets.

To be sure, the government has already cleared appointment of 18 new members to NCLT. Similarly, public opinion has been sought for better functioning of CoC.

We believe that timely implementation of these recommendations will go a long way to strengthen the Code. Quick rollout of insolvency frameworks for group/cross-border, financial service providers, and personal insolvency will further expand the ambit of IBC.

¹ As of June 30, 2021, IBC had enabled recovery of ~Rs 2.5 lakh crore, against admitted financial claims of ~Rs 7 lakh crore – translating to a recovery rate of 36% – for the 396 cases resolved out of the total 4,541 admitted. Of the remaining cases, 1,349 were under liquidation; 1,114 were closed under appeal/ review/ settled or withdrawn, and 1,682 were outstanding.
² CRISIL Ratings estimates stressed assets in the Indian banking system, comprising gross NPAs and loan book under restructuring, at ~10-11% by March 2022.