Rs 7.3 trn debt settled before initiating insolvency: Economic Survey

However, concerns have lately been raised over declining rates of recovery in comparison to their claims admitted through the IBC mechanism, resulting in large haircuts for lenders

The Insolvency and Bankruptcy Code (IBC) has managed to bring about a change in the debtor-creditor relationship, with the fear of losing control over  one's enterprise nudging thousands of debtors to settle their dues with their creditors so that their company is not pushed into insolvency proceedings, the Economic Survey of 2022-23 has observed.

Data shows, up until H1FY23, as many as 23,417 applications for initiating the corporate insolvency resolution process (CIRP) of corporate debtors having underlying defaults of Rs 7.3 trillion were disposed of before their admission into CIRP.

“One of the far-reaching spill-over effects of the Code has been the behavioural change effectuated by it among debtors. The fear of losing control over the CD upon initiation of CIRP has nudged thousands of debtors to settle their dues even before the initiation of insolvency proceedings,” the Economic Survey noted.

According to the survey, IBC, introduced in 2016, has imbibed some of the best international practices of an asset resolution mechanism by providing an honourable exit mechanism for honest business failures and enabling the release of credit locked into the stressed assets for better resource allocation. “This market-driven, transparent resolution mechanism instills confidence in the financial system and attracts many new investors to invest in Indian businesses,” the survey noted.

Having said that, concerns have lately been raised over the declining rates of recovery in comparison to their claims admitted through the IBC mechanism, resulting in large haircuts for lenders.

However, defending the IBC process, the Reserve Bank of India (RBI) in its Trend and Progress Report said, the extent of haircut represents the discount the market demands for acquiring the stressed entity as a going concern. Also, the rate of recovery is contingent on several factors, including the overall macroeconomic environment, perceived growth prospects of the entity and its sector, and the extent of erosion in the intrinsic value of the entity. As a broad-based recovery gains traction, these factors are likely to turn favourable for financial resolution, the RBI had said.

The RBI has suggested that the comparison of realised value with admitted claims may perhaps not be a reasonable indicator of the effectiveness of the resolution process. Instead, the resolution value should be compared with the liquidation value of the stressed assets.

The Economic Survey noted that despite the very low value of the distressed firms, 69 per cent of distressed assets were rescued by the Code, until September 30, 2022. And, overall, in terms of value realisation for initiators of CIRPs, the resolution plans realised Rs 2.4 trillion, which is 177.6 per cent of the liquidation value and 841 per cent of the fair value of the 553 corporate debtors rescued. Moreover, realisation by financial creditors under resolution plans in comparison to liquidation value was 201 per cent, while the realisation by them was 33 per cent of their claims.

Further, RBI data suggests, in FY 22, the total amount recovered by SCBs under IBC has been the highest compared to other channels such as Lok Adalat’s, SARFAESI Act and Debt Recovery Tribunals (DRTs) in this period, proving the effectiveness of the new mechanism. In FY22, recovery through IBC was to the tune of Rs 47,421 crore, constituting about 53 per cent of the total recoveries made under various recovery channels.

Since the inception of the code, as many as 5,893 Corporate CIRPs have commenced by end-September 2022, of which 67 per cent have been closed. Of these, around 21 per cent were closed on appeal or review or settled, 19 per cent were withdrawn, 46 per cent ended in orders for liquidation, and 14 per cent culminated in the approval of resolution plans, Economic Survey of 2022-23 said.