The portrait of Mahatma Gandhi is displayed on an Indian 2,000 rupee, top, and 500 rupee banknotes in an arranged photograph (Photographer: Brent Lewin/Bloomberg)  

IBC Is The Most Efficient Debt Recovery Mechanism

The Insolvency and Bankruptcy Code, 2016 has emerged as one of the fastest debt recovery mechanisms in India. But it’s still a work in progress.

Recovery through the IBC stood at Rs 70,000 crore in financial year ended March 2019, nearly twice the Rs 35,500 crore recovered in 2017-18, Crisil Ratings said in a report.

Also, the recovery rate for cases resolved under the IBC has outpaced other resolution mechanisms such as the Debt Recovery Tribunal, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, and Lok Adalat. The IBC has brought in credit discipline and empowered the creditor, Crisil said.

The recovery rate for 94 cases resolved under the IBC in 2018-19 stands at 43 percent compared to 26.5 percent achieved through earlier mechanisms, Gurpreet Chhatwal, president at the rating agency, said. “The recovery rate is also twice the liquidation value for these 94 cases, which underscores the value maximisation possible through the IBC process.”

The IBC is a major reform for India to resolve firm stress. It mandates a 180-day timeline, extendable to 270 days, to complete the resolution process, and views both revival and liquidation as means of resolving stress.

It has shifted the balance of power to the creditor from the borrower. The fear of losing assets to a failed resolution process has instilled a sense of urgency and seriousness among defaulters, the rating agency said in the report.

About Rs 2.02 lakh crore debt in 4,452 cases were disposed of even before being dragged to the bankruptcy court, Crisil said citing a report by the Insolvency and Bankruptcy Board of India.

That’s reflected in the slower accretion of new bad loans for Indian banks, according to Crisil. The banking sector’s aggregate gross non-performing assets contracted to 10 percent as of March from 11.5 percent a year ago, it said.

Yet, resolution timeline remains a challenge. While the average time taken to resolve cases under the IBC is 324 days, which is better than 4.3 years earlier, it’s still above the 270 days mandated in the code, Crisil said.

As on March 31, there were 1,143 cases outstanding under the IBC. Of this, resolution in 32 percent of the cases was pending for more than 270 days, it said.

Significant delays also trigger liquidation, it said. According to the IBBI, 378 corporate debtors were facing liquidation as of March 2019. There are also a few big-ticket accounts whose resolution has not been finalised for more than 400 days, Crisil said.

Besides, there are other challenges such as burden of cases on the National Company Law Tribunal, clarity on priority of claims, limited number of information utilities and the creation of a secondary asset market, it said.

“Its success will hinge on timely resolution of stressed assets and a conducive ecosystem,” Nitesh Jain, director at the rating agency, said.

Also read: IBC’s Liquidation Overhaul: Not Ideal But Enough?