Recovery rates under the Insolvency and Bankruptcy Code (IBC) have fallen from 43 per cent to 32 per cent between March 2019 and September 2023, even as the average resolution time has increased from 324 to 653 days versus the stipulated 330 days, according to CRISIL Ratings.

The credit rating agency attributed two reasons for the decline in recovery rates. First, limited judicial bench strength and delays in identification and acknowledgement of default.

Second, significant delay in the pre-IBC admission stage (650 days in fiscal 2022 increased from about 450 days in fiscal 2019) has suppressed recovery rates. This has led to a diminution in asset values and sub-optimal recoveries.

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“To improve efficacy, new amendments have been made to the IBC in the past 12 months. These include approval for sale of assets/ resolution plan on a segregated basis, increasing the number of National Company Law Tribunal benches to 16, and extending timelines for filing claims, among others,” CRISIL said.

Additionally, sector-specific amendments, provision for audit of corporate debtor, and modifications in Form-G2 will also improve the process.

The agency observed that these amendments and their effective implementation can reduce resolution times and backlog of cases over the near to medium term.

Borrowers: Behavioural change

The agency assessed that IBC has helped resolve Rs 3.16 lakh crore of debt stuck in 808 cases in the past seven years, with creditors, on an average, realising 32 per cent of the admitted claims and 169 per cent of the liquidation value.

Other mechanisms such as the Debt Recovery Tribunal (DRT), the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002), and Lok Adalat had an average recovery rate of 5-20 per cent, which underscores IBC as the one with higher recovery for lenders, a statement by the credit rating agency said.

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Mohit Makhija, Senior Director, CRISIL Ratings, said: “IBC is, undoubtedly, the most potent code in India’s corporate loan history, and has brought about a behavioural change among borrowers.

“The fear of losing companies has led to over Rs 9 lakh crore of filed debt being settled before the cases arrived at the IBC’s doorstep for admission. This is about three times the stressed debt resolved via the code in the past seven years, underscoring its deterrence effect.”

Improved credit culture

The agency emphasised that since inception in 2016, the IBC has improved the credit culture in India by resolving a significant amount of stressed assets with better recovery rates compared with previous mechanisms, such as DRT, the SARFAESI Act, and Lok Adalat. Importantly, it has set such deterrence that large bad-loan cases are getting sorted before reaching the IBC’s gates.

Sushant Sarode, Director, CRISIL Ratings, suggested that the IBC’s effectiveness can be improved using the CDE approach, where C stands for Capacity augmentation, D for Digitalisation, and E for Expansion of pre-pack resolutions to large corporates.

“Improved infrastructure such as expanding bench strength of judges for higher throughput of cases, digitalisation of IBC platforms to connect all stakeholders to eliminate data asymmetry, and expansion of scope of pre-pack insolvency resolution for large corporates will prevent value erosion due to time.

“Implementation using this approach will help clear the backlog of 13,000 cases stuck in various stages of IBC resolution,” he said.

The agency observed that some of the other measures such as facilitation of cross-border insolvency processes, standardisation of valuation methodologies, and introduction of specialised resolution frameworks for specific sectors (such as project specific resolution for real estate) where IBC’s success has been elusive, will also help enhance the effectiveness of IBC. Their promulgation and implementation will bear watching.

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