The introduction of a focused bankruptcy law in India, known as the Insolvency and Bankruptcy Code (IBC), has been instrumental in transforming the credit culture in the country. However, recent years have witnessed a decline in recoveries and a significant extension of resolution timelines, according to a report by CRISIL Ratings.
As of September 2023, the recovery rates have dropped to 32%, down from 43% in March 2019. Concurrently, the average resolution time has surged from 324 days to 653 days, well beyond the stipulated 330 days. CRISIL Ratings notes that the IBC has successfully resolved debt amounting to Rs 3.16 lakh crore in 808 cases over the past seven years, making it a critical tool in the corporate loan landscape.
Mohit Makhija, senior director at CRISIL, hails the IBC as the “most potent code” in India’s corporate loan history, attributing a notable behavioral change in borrowers to the fear of losing companies. He highlights that over Rs 9 lakh crore of filed debt has been settled even before reaching the IBC doorstep for admission, indicating a deterrent effect that is three times the stressed debt resolved through the code in the same period.
Despite its success, CRISIL Ratings points out challenges that need to be addressed. The limited judicial bench strength and delays in identifying and acknowledging defaults are identified as impediments leading to extended resolution timelines. Delays in the pre-IBC admission stage have significantly impacted recovery rates, with the period increasing from 450 days in fiscal 2019 to 650 days in FY22.
The report emphasizes that 90 amendments have been made to the IBC thus far, including recent ones like approving the sale of assets/resolution plans on a segregated basis, increasing the number of National Company Law Tribunal benches to 16, and extending timelines for filing claims. Sushant Sarode, director at CRISIL, suggests solutions to current challenges, advocating for capacity augmentation, digitalization, and expanding pre-pack resolutions to large corporates to enhance the efficiency of the IBC.
However, despite its successes, there is a backlog of 13,000 cases under the IBC, including 2,073 ongoing corporate insolvency resolutions. CRISIL Ratings underscores that the recoveries from the IBC still outperform earlier debt resolution mechanisms, which typically yielded between 5-20% recovery rates.
