The Insolvency and Bankruptcy Code (IBC) was expected to vastly improve recovery for banks and reduce the time taken to resolve default cases. Six years later, the government and regulators have shifted the goalposts. Recently, the Reserve Bank of India in its Financial Stability Report said that recovery through resolutions should not be compared with claims submitted by banks. Instead, they should be compared with the liquidation value of the company undergoing resolution. This after recoveries from resolution processes through IBC have fallen drastically to 30.7% (as of September 30, 2022). Before IBC came into force, average recoveries were 26% and the time taken for resolution was four years. The banking and insolvency regulators, which once hailed the IBC as the biggest reform (bigger than GST) of our times, are now finding it difficult to explain the massive haircuts banks are taking to resolve cases of NPAs through the IBC. With an average recovery rate of 30%, banks lose 70% of the debt given to these companies. This is not the pretty picture one had expected when IBC was implemented.
The pace of resolution has indeed increased, with the average time taken for resolution coming down from four years to 561 days. But early resolutions have come at a cost. In many cases, banks have taken haircuts of 90–95%. In many cases where financial or operational creditors have raised their voices against such low recoveries, courts and tribunals have silenced them, saying they cannot question the “commercial wisdom” of the committee of financial creditors. But there is a sense of unease among many stakeholders—so much so that a Parliamentary finance committee even floated the idea of a ‘threshold’ for a haircut. The idea of a threshold below which banks can’t take haircuts is not the most rational solution, but it shows that the concern over low recovery rates under IBC is very palpable.
Resolution through IBC has seen many success stories in the form of the turnaround of companies like Essar Steel, Monnet Ispat, Alok Industries, DHFL, etc. Still, banks have lost lakhs of crores in the transition of these companies. And with the latest narrative—recoveries should be judged vis-à-vis liquidation value—it seems the authorities have convinced themselves they cannot expect better results from IBC.