IBC helps recover Rs 2.5 trn in past 5 years from bad assets, says CRISIL

Only a few large cases see good recovery and the average time taken for resolution is 419 days.

The Insolvency and Bankruptcy Code (IBC) has since 2016 helped recover Rs 2.5 trillion from bad assets compared to admitted claims of Rs 7 trillion, thus clocking a recovery rate of 36 per cent as of June 2021, said a report by rating agency CRISIL.

Of the 4,451 cases admitted under the IBC process, 396 were resolved, 1,349 were liquidated, 1,114 were closed or withdrawn, and 1,682 are still pending.

The headline numbers do not say all though. The reality is only a few large cases have seen good recovery. Excluding the top 15 cases (by resolution value) from the 396 resolved cases, the recovery rate halves to 18 per cent, the report said. Recently, the resolution of mortgage lender Dewan Housing Finance resulted in a recovery of Rs 37,000 crore against admitted claims of Rs 87,000 crore, resulting in a recovery rate of 43 per cent. Also, the resolution value was almost 1.4 times the liquidation value.

“..while the IBC has tilted the power equation in favour of creditors from debtors and helped strengthen India’s insolvency resolution ecosystem, its performance against its twin objectives – maximisation of recovery and timebound resolution – has been a mixed bag”, the report said.

According to CRISIL, the average time taken for resolution of cases is 419 days. The stipulated time for resolution under IBC is 330 days. Around 75 per cent of outstanding cases are pending for more than 270 days.

““Besides low recovery rate and longer timeframe, a key challenge is the high number of cases going to liquidation. As of June 2021, nearly one-third of the 4,541 admitted cases had gone into liquidation, with a recovery rate estimated at merely 5 per cent”, said Nitesh Jain, director at CRISIL Ratings.

“That said, around three-fourths of these cases were either sick or defunct. With closure of these vintage cases, recovery rate as well as timelines are expected to improve”, he said.

Despite the challenges IBC is facing, it has managed to make significant progress in India’s credit culture. But its effectiveness will continue to be tested given the elevated level of stressed assets in the Indian financial system. Hence, a continuous strengthening of IBC and stabilisation of the overall ecosystem is imperative.

In August, the Parliament’s Standing Committee of Finance made certain recommendations to strengthen the code. Their recommendations included developing specialised National Company Law Tribunal (NCLT) benches to hear only IBC matters; establishing professional code of conduct for committee of creditors (CoC); strengthening the role of resolution professionals; and digitalising IBC platforms in order to make the resolution process faster and maximise the realisable value of assets.

“We believe 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”, said CRISIL.