NEW DELHI: There’s a lot more room for improvement for the Insolvency and Bankruptcy Code (IBC) as it completed five years and helped recover Rs 2.5 lakh crore, says a recent note by rating agency Crisil.
“A closer look at the data shows, however, the recovery rate and resolution timelines have a lot more room for improvement. This makes a continuous strengthening of the Code and stabilisation of the overall ecosystem imperative,” says the note by the rating agency.
Over five years since it took effect, the IBC has helped recover around Rs 2.5 lakh crore, or around one-third of the admitted financial claims from insolvent firms, marking a significant shift in the insolvency resolution process and credit culture in India.
The new Insolvency law, which came into existence in 2016, is a complete shift from the earlier laws as unlike the earlier laws, IBC gives the creditors full control of the recovery process. That has hastened the resolutions process, and ensured better resolutions. However, delays in resolution and low recovery continue to be a big question mark on the effectiveness of the whole process.
“Only a few large cases have seen higher recovery. Excluding the top 15 cases (by resolution value) from the 396 resolved cases, the recovery rate halves to 18% (refer to Chart 2 in Annexure). Two, average resolution time for the aforementioned resolved cases is 419 days compared with the stipulated maximum of 330 days. About 75% of outstanding cases have already been pending for more than 270 days,” observes the Crisil report.
Nitesh Jain, Director, CRISIL Ratings Ltd, says that besides low recovery rate and longer timeframe, a key challenge is the high number of cases going to liquidation. “As of June 30, 2021, nearly one-third of the 4,541 admitted cases had gone into liquidation, with a recovery rate estimated at merely 5%. That said, around three-fourths of these cases were either sick or defunct. With closure of these vintage cases, the recovery rate as well as timelines are expected to improve,” says Jain.
However, Crisil acknowledges the fact that despite these challenges, the IBC has played a key role in the resolution of stressed assets so far. Its effectiveness will continue to be tested given the elevated level of stressed assets in the Indian financial system, it says.
In August this year, the Standing Committee on Finance made recommendations to reinforce the IBC and the associated ecosystem. The government has already cleared appointment of 18 new members to NCLT.
Similarly, public opinion has been sought for better functioning of CoC. Crisil believes that timely implementation of these recommendations will go a long way to strengthen the Code. Quick rollout of insolvency frameworks for group/cross-border, financial service providers, and personal insolvency will further expand the ambit of IBC.