IBC enabled debt resolution of ₹26 trillion in 9 years, says Crisil

The Insolvency and Bankruptcy Code (IBC) has led to the resolution of Rs 26 trillion in debt over nine years, creating significant deterrence among borrowers and offering flexible resolution framework

The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 has enabled the resolution of total debt worth Rs 26 trillion to date, reflecting its deterrent effect on defaulting borrowers. The direct resolution of approximately Rs 12 trillion of debt for about 1,200 cases of stressed borrowers, according to CRISIL Ratings' analysis.

 

More importantly, it has also created significant deterrence among borrowers, leading to the settlement of around 30,000 cases with approximately Rs 14 trillion of debt, even before applications made to the National Company Law Tribunal (NCLT) were admitted, it said.

 

CRISIL, in a statement, said IBC brought a change in the debt resolution approach by shifting from a "debtor-in-control" model to a "creditor-in-control" framework. This distinguishes IBC from other debt resolution mechanisms existing prior to it, such as the Debt Recovery Tribunal (DRT), Lok Adalat, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI).

 

Since 2016, the total debt of around Rs 48 trillion has been resolved across different debt resolution mechanisms. The average recovery rate under the IBC has been the highest at 30-35 per cent, compared to around 22 per cent for SARFAESI, about 7 per cent for DRT, and just 3 per cent for Lok Adalat. 

 

The relative success of the IBC compared to other debt resolution mechanisms has been due to factors like the flexibility accorded to creditors to change the management of viable assets on a going-concern basis and to right-size debt. These, coupled with the improved economic environment over the past three fiscals, have boosted investor interest, especially in the infrastructure and manufacturing sectors, CRISIL said.

 

Mohit Makhija, Senior Director, Crisil Ratings, said, “Aided by its deterrence effect, IBC will remain the preferred route for debt resolution in the days ahead. The improved economic viability of infrastructure and manufacturing assets makes them lucrative for investors to acquire and turn around under the IBC. Further, small- to mid-sized assets, which form around 85 per cent of the IBC's unresolved pipeline, are likely to attract investors with varied risk appetites,” he added.

 

The IBC also enabled the resolution of numerous small- to mid-sized distressed assets in recent years. This is exemplified by the fact that while the past three fiscals accounted for 60 per cent of all resolution approvals since the IBC’s introduction, they represented only 40 per cent of the total debt. A higher number of eligible investors, who qualify to participate in bids, will keep the demand for these small- to mid-sized distressed assets intact.

 

While IBC has been periodically amended to further enhance its efficiency, stretched timelines and limited success in implementation for certain sectors may require some additional interventions, it added.