'Zombie firms' reflect inefficient insolvency resolution, says IMF report

'IBC Amendment Bill does not provide for the participation of operational creditors'

The International Monetary Fund, in its report on the Indian economy, said the Insolvency and Bankruptcy Code (IBC) Amendment Bill addresses many deficiencies but it has not provided for the participation of operational creditors or rules for executory contracts. The IMF staff report said that the business dynamism in India remains relatively low, marked by low rates of entry and exit, and a high share of inactive or inefficient firms reflecting structural rigidities and high compliance levels.

 

“The persistence of zombie firms may reflect issues with forbearance lending, inefficient insolvency resolution, and exit mechanisms,” IMF said.

 

IMF said that among continuously operating firms, a significant share — 15 per cent — qualifies as zombie firms, which do not generate enough earnings to cover their interest expenses but continue to operate, mostly with very low levels of productivity. 

 

On the IBC Bill, the report noted that operational creditors still lack the right to vote on a resolution plan or other governance rights. It said, “No rules are provided for executory contracts. Such rules would make it more likely that business operations could be restructured rather than sold.”

 

Indian authorities told the IMF that they anticipated the recent IBC Amendment Bill to expedite the bankruptcy resolution process.

 

IMF’s report highlighted that the recovery rates for financial creditors in successful corporate resolutions declined from 43 per cent in March 2019 to 33 per cent in June 2025. The pre-admission delays — the time between filing of the insolvency application and the opening of the case — have worsened, with operational creditors facing an average wait of 650 days in 2022 compared to 450 days in 2019, the IMF noted.

 

The report estimated entry and exit rates of firms in India at less than 1 per cent, far below the 8 to 13 per cent annual rates typically observed in economies like the US, European countries,

 

Republic of Korea and Chile.

 

The report had said that the legislative reforms being undertaken by the government should be complemented by efforts to strengthen judicial capacity through dedicated tribunal benches and adequate funding, along with operationalising the personal insolvency regime.

 

“Such persistence of inefficient firms likely reflects structural rigidities in India’s business environment, including weak insolvency resolution and limited access to exit mechanisms,” IMF said. It added that low entry rates may reflect the high regulatory compliance burdens that discourage entry into the formal sector.

 

The Fund said that the government should undertake reforms to improve credit allocation in the financial sector to help reallocate resources to more productive firms. 

Findings of the report

• Business dynamism in India remains relatively low
• 15% qualify as zombie firms among continuously operating firms
• On IBC Bill,  operational creditors still lack right to vote on a resolution plan 
• Decline in recovery rates for financial creditors in successful corporate resolutions 
• Entry and exit rates of firms in India less than 1%