Creditors' haircuts in bankruptcy cases jump to 73% in FY24: Report

The haircuts taken by creditors in bankruptcy resolutions have increased to 73 per cent in FY24 from the 64 per cent in FY23, a report said on Friday.

A total of 269 resolution plans were approved by the National Company Law Tribunals (NCLTs) in FY24, up from 189 in the year-ago period, the report by domestic rating agency Icra said.

The new admissions declined to 987 in FY24 from the 1,263 in FY23, the agency said, attributing the same to a higher base in the previous fiscal because of the Covid-19 pandemic-related stress.

It can be noted that the haircuts, or sacrifices, in comparison to the total dues, which are done by lenders when it comes to corporate insolvency resolutions has led to some concerns in the past about the value at which a new bidder is getting the assets.

Its group head for structured finance ratings, Abhishek Dafria said there has been a "worsening" of the haircuts which are taken by the creditors through the Insolvency and Bankruptcy Code (IBC) process to a steep 73 per cent as against 64 per cent in FY23, which was already high.

He said the average time taken for a resolution has increased to 843 days in FY24, up from 831 days in 831 days because of the litigations, and called it out as among the reasons why the haircuts have also gone up. It can be noted that the bankruptcy law envisaged a resolution to take 330 days.

The agency feels the average recoveries for lenders will continue to be in the 30-35 per cent range in FY25.

Dafria said the increase in the number of CIRPs (corporate insolvency resolution process) to 269 has been heartening, and added that an entity continues as a going concern through this.

The decline in fresh additions has helped to bring down the ongoing CIRPs at NCLTs to 1,920 as on March 31, 2024, from 1,953 a year ago.

In addition to the CIRPs, the NCLT also passed liquidation orders for 446 corporate debtors in FY24 against 400 corporate debtors in FY23. The number of CIRPs that have resulted in liquidation continues to be significantly high, at 45 per cent of the 5,467 closed CIRPs, since the inception of IBC, it said.

Only 17 per cent yielded a resolution plan with the remaining cases withdrawn post NCLT admission, the agency said, adding that liquidation for 960 corporate debtors had been completed by March 2024 wherein the creditors realised a paltry 4 per cent of their total admitted claims.

"More than 75 per cent of the CIRPs that entered into liquidation had been defunct entities or were already under the Board of Industrial and Financial Reconstruction (BIFR) at time of admission under the IBC," he said.