MUMBAI: The Insolvency and Bankruptcy Code (IBC), introduced nine years ago in May 2016, has enabled direct resolution of Rs 12 trillion (excluding cases under liquidation) of debt across 1,200 cases of stressed borrowers but when the indirect resolutions are considered, the number tops Rs 26 trillion and another Rs 22 trillion of debt have been resolved through other mechanisms.
While the IBC has directly resolved Rs 12 trillion worth of stressed loans, it has also created significant deterrence amongst borrowers leading to the settlement of 30,000 cases with Rs 14 trillion of debt even before insolvency applications were admitted by the various benches of the national company law tribunals (NCLTs), shows and analysis by Cirisil Ratings.
When the number of resolutions through the pre-IBC mechanisms like the debt recovery tribunals (DRTs), the lok adalats and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi), the total resolved debt tops Rs 48 trillion since 2016.
While the IBC has been periodically amended to further enhance its efficiency, stretched timelines and limited success in implementation for certain sectors may need some more interventions, the report notes.The primary changes in debt resolution approach that IBC brought in has been the shift from a debtor-in-control model to a creditor-in-control framework that distinguishes it from other debt resolution mechanisms existing prior to IBC such as the debt recovery tribunals (DRTs), the lok adalats and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi).
This has meant that since 2016, of the total resolved debt of Rs 48 trillion across different debt resolution mechanisms, the average recovery rate under the IBC has been the highest at around 35%, versus 22% for Sarfaesi, 7% for DRTs and 3% for lok adalats.
Other reasons for the relative success of the IBC over other debt resolution mechanisms include the flexibility accorded to creditors to change the managements of viable assets on a going-concern basis and to right-size debt. These, coupled with the improved economic environment over the past three fiscals, have boosted investor interest, especially in the infrastructure and manufacturing sectors.
The IBC has also enabled the resolution of numerous small-to-mid sized (up to Rs 500 crore) distressed assets--while the past three fiscals accounted for 60% of all resolution approvals since the IBC, it represented only 40% of the total debt. According to Mohit Makhija, a senior director with Crisil, one-fourth of total debt resolved since 2016 has been through the IBC, contributing to 50% of total recovery.
Aided by its deterrent effect, the IBC will remain the preferred route for debt resolution going ahead as well. Further, small-to mid-sized assets, which form 85% of the IBC's unresolved pipeline, are likely to attract investors with varied risk appetites.
That said, the key challenge, according to him that IBC faces, has been the high backlog of cases at the NCLTs, primarily due to procedural delays at various stages and cross-litigation by stakeholders stretching the resolution timelines beyond what was earlier envisaged (713 days as of last fiscal vs the regulatory prescribed 330 days).To address this, the Insolvency and Bankruptcy Board of India (IBBI) has increased the bench strength of NCLTs, allowed routine submissions by resolution professionals online, and enabled part-wise resolution of corporate debt.
The IBBI has also identified areas of improvement in the IBC process for the realty and small businesses sectors. Real estate sector faces complexities such as cross-collateralisation and land authority issues, while small businesses lack clear categorisation and stakeholder efforts to revive the sector through what is known as the pre-pack framework are yet to gain much traction.
The pre-pack framework refers to an out-of-court settlement involving negotiation of a pre-determined resolution plan with creditors before formally initiating insolvency proceedings. Following multiple discussion papers and consultations with expert panels, the IBBI has introduced sector-specific amendments, streamlining the process with the objective to improve timelines and recovery potential.
According to Tanvi Fifadra, an associate director with Crisil, increasing the NCLT bench strength by 15 judicial members will help reduce the backlog of 7,000 cases pending with these tribunals as of March 2025.
Furthermore, recent amendments targeting the real estate sector may expedite the resolution of 200 cases, with total admitted claims of Rs 70,000 crore, which have been pending for an average of 2.5 years. However, slow progress on MSME debt resolution, with only eight cases resolved through pre-pack, remains a concern for stakeholders.