Recoveries by financial creditors under IBC shrink to 33%, shows data

Recoveries by financial creditors under the Insolvency and Bankruptcy Code (IBC) have dropped significantly in the past two years owing to the pandemic, resulting in larger haircuts for them.

As of March 2022, financial creditors have recovered 33 per cent of the amount admitted as claims.

It was 39.3 per cent as of March 2021, and as high as 46 per cent till March 2020, according to the Insolvency and Bankruptcy Board of India (IBBI) data. Further, on a quarterly basis, realisation by financial creditors as a percentage of their admitted claims in Q4FY22 dropped to as low as 10 per cent.

In the preceding quarter (Q3FY22), it stood at 13 per cent. However, in the first two quarters of FY22 (Q1 and Q2), the rate was 25 per cent and 49 per cent, respectively.

In Q4, the amount realised by financial creditors dropped below the liquidation value of assets. “The haircut for cases resolved in Q4FY22 was high at 90 per cent. The overall haircut scenario is not very encouraging. As we are working through some of the weaker assets where there are incomplete projects or sectors which are seeing very poor demand from buyers, the realization values have started to come down,” said Kotak Securities.

The number of new cases admitted under the insolvency process has also gone down in FY22, with only 834 cases admitted as against 2,000 cases in FY20.

Experts reckon the pandemic-induced slowdown in the economy and delays in the resolution process are the root cause behind the drop in realisation. Having said that, recovery under the IBC is still far higher than other measures.

“Recovery dipped more on account of the situation arising out of Covid and the general impact it had on a number of sectors, which in turn did not attract enough bids/takers,” said Ajay Shaw, partner, DSK Legal. “Also, some of the corporate debtors in insolvency had seen substantial value erosion, which impacts recovery for financial creditors,” he said.

As of March 2022, the amount of debt resolved through the IBC stands at Rs 6.85 trillion, and the creditors have realised around Rs 2.25 trillion, which is 171 per cent of the liquidation value of such assets.

Abhishek Swaroop, partner, Saraf and Partners Law Offices, said: “Recovery for financial creditors has been primarily affected due to the pandemic and the resultant economic slowdown causing loss of investor appetite for stressed assets.”

Court-led delays — caused by protracted legal battles not only before the various Benches of the National Company Law Tribunal and National Company Law Appellate Tribunal, but also high courts — are adding to the problem. Also, with prime assets being resolved, the assets that are left are not fetching great value for potential investors, Swaroop said.