Since inception in 2016, the Insolvency and Bankruptcy Code (IBC) has improved the credit culture in India by resolving a significant amount of stressed assets with better recovery rates compared with the previous mechanisms, such as the Debt Recovery Tribunal, the SARFAESI Act and Lok Adalat¹. Importantly, it has set such deterrence that large bad-loan cases are getting sorted before reaching the IBC gates.

The IBC itself has been evolving, with more than 90 amendments made till date to improve resolution timelines and maximise value. Focussed implementation of some of the recent and proposed amendments related to capacity augmentation, digitalisation of IBC platforms and expansion in scope of implementation of pre-pack resolution plans are critical to further ramp-up efficiency.

In terms of value, the IBC has helped resolve ~Rs 3.16 lakh crore of debt stuck in 808 cases in the past seven years. On average, creditors have realised ~32% of the admitted claims and ~169% of the liquidation value. Other mechanisms had an average recovery rate of 5-20%, which underscores IBC as the one with higher recovery for lenders.

Says Mohit Makhija, Senior Director, CRISIL Ratings Ltd, “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 doorstep for admission. This is ~three times the stressed debt resolved via the code in the past seven years, underscoring its deterrence effect.”

But for IBC to continue succeeding, some impediments need to be removed. For example, recovery rates have fallen from 43% to 32% between March 2019 and September 2023, even as the average resolution time has increased from 324 to 653 days versus the stipulated 330 days (see chart 1 in annexure).

There are two reasons for this. 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.

To improve efficacy, new amendments in the past 12 months have been made to the IBC. 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. Additionally, sector-specific amendments, provision for audit of corporate debtor, and modifications in Form-G² will also improve the process. These amendments and their effective implementation can reduce resolution times and backlog of cases over the near to medium term.

Says Sushant Sarode, Director, CRISIL Ratings Ltd, “The IBC’s effectiveness can be increased using 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 for connecting all stakeholders to eliminate data asymmetry, and expansion of scope of pre-pack insolvency resolution³ for large corporates will prevent value erosion due to time. Implementation using this approach will help clear the backlog of ~13,000⁴ cases stuck in various stages of IBC resolution.”

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.

¹ The average recovery rate for SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002), DRT (Debt Recovery Tribunal) and Lok Adalat during fiscals 2018 to 2022 were 21%, 5% and 4%, respectively.
² Prescribed format for publication of notice to invite expression of interest from potential bidders.
³ Pre-pack insolvency is currently only applicable to MSMEs. This is a speedier, comparatively informal process wherein lenders and borrowers, by mutual understanding, can arrive at a resolution plan and approach NCLT for approval.
⁴ Includes 2073 on-going CIRP cases and balance are cases filed but not yet admitted.