Recovery rate from personal guarantors may rise: CareEdge Ratings

The recovery rate from personal guarantors under the Insolvency Bankruptcy Code (IBC), which currently stands at 5.22 per cent, is likely to rise after the Supreme Court’s (SC) ruling affirming the constitutionality of the IBC provisions regarding Personal Guarantors’ Insolvency Resolution, said a report by CareEdge Ratings.

The Supreme Court upheld the constitutionality of IBC provisions on Personal Guarantors’ Insolvency Resolution, dismissing over 200 petitions which challenged its legal validity.

This ruling implies that the personal assets of guarantors can now be utilised to settle outstanding debts owed to creditors.

Out of total cases admitted between financial year 2019-2020 (FY20) and second quarter of FY24 (Q2FY24), only 21 have yielded approval of repayment plans and have realised Rs 91.27 crore, which is 5.22 per cent of their approved claims, whereas 62 cases have been either withdrawn or rejected or dismissed, the report said.

The analysts at the rating agency also observed an increase in delays for Corporate Insolvency Resolution Process (CIRP).  

As per the data, there has been a delay of more than 270 days for the completion of process in 67 per cent of the ongoing CIRPs in September 2023 as compared to 63 per cent in September 2022. In September 2021, it was 73 per cent. The second largest segment is the ‘more than 180 but less than 270 days’ section which has moved up to 13 per cent of the cases in September 2023 from 11 per cent in September 2022.

On the other hand, the segment with more than 90 days but less than 180 days’ has seen 10 per cent of the cases being pending in September 2023, down from 15 per cent in September 2022.

The time for liquidation also remains elevated with nearly 55 per cent of the cases being pending for over 2 years and another 20 per cent being pending for more than a year.

The admission of cases for CIRP has increased by nearly 19 per cent year-on-year (Y-o-Y) in Q2FY24. However, despite the increase, the number of cases admitted to the insolvency process continues to be lower compared to earlier quarters in FY20.

IBC has continued to gain in popularity, with nearly 7,058 companies being admitted. Of these, 3,141 are filed by financial creditors on a cumulative basis and 3,491 are filed by operational creditors.

Among the overall cases, the manufacturing sector accounts for the highest share at 38 per cent of the overall cases, followed by the real estate at 21 per cent, construction at 11 per cent and trade (wholesale & retail) sectors at 10 per cent.

The overall recovery rate which has seen a marginal decline process still continues to be around 30 per cent.

The recovery rate in the April-September quarter (Q2FY24) stood at 33.01 per cent, whereas the overall recovery rate reached 31.85 per cent. “Consequently, for the cases that have been resolved, the creditors have continued to face a haircut of approximately 68 per cent on admitted claims. Some of the cases being disposed of are several years old. Thus, there is a huge amount of interest and overdue charges admitted to such cases, inflating the overall figures,” as per the report.