Speed and capacity

Restoring trust in IBC must be a priority

The Insolvency and Bankruptcy Code (IBC) is one of the biggest achievements of this government in the field of economic reform. When properly administered, the IBC increases financial flexibility and allows the speedy repurposing of capital that would otherwise have been locked up in unproductive projects. The Reserve Bank of India’s Trend and Progress in Banking Report for 2021-22, released this week, provides an opportune moment for reflection on how the IBC is doing when it comes to recovering value for financial creditors. It will be remembered that much of the bankruptcy mechanism was suspended for months during the pandemic. Now that the normal machinery has resumed, the question is whether it needs further reform.

The general hope that the IBC would lead to greater recovery of assets and value preservation than previous systems does not, unfortunately, seem to be borne out by the data. Recovery rates, according to the RBI report, were not at a level noticeably higher than those achieved under the legacy systems, namely the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act or the debt recovery tribunals. The RBI report, however, downplayed the importance of the recovery rate as a signifier of the effectiveness of the system. Instead, it sought to identify a different marker, and pointed out that realisations under the IBC till the second quarter of 2022-23 were about 201 per cent of the estimated “liquidation value” of the assets in the bankruptcy system. It made a case that comparisons with the liquidation value were appropriate since the entities entering the IBC may have already undergone significant value destruction of asset holdings.
 

However, this simply begs the question about the overall effectiveness of the IBC system. Why are entities being referred in such a tardy manner to the IBC, after value destruction has already taken place? The original idea of the IBC was to provide swift resolution, and so financial creditors looking to preserve the value of their assets would have been eager to move swiftly into the process before value destruction took place. But understaffing, particularly, of the National Company Law Tribunal (NCLT), has caused delays within the IBC: The current time for resolution is around 680 days, compared to 230 days in 2017-18 when the IBC was new. Almost two-thirds of the cases have gone on beyond the mandated nine months. The understaffing of the NCLT by the government has led many banks in particular to instead drift towards handing over stressed assets that could potentially be recovered to the National Asset Reconstruction Company Ltd (NARCL). In other words, it is the government’s failure to adequately highlight, capitalise, and invest in its own major reform that has caused it to underperform expectations.

Ensuring that the IBC returns to time-bound performance must be a priority. Yet the government has stated in Parliament, in response to a question, that it has no current plans for reform to speed up the resolution process under the IBC. In the process’s early days, the government was flexible and willing to make changes on the fly in response to slowdowns and failures. This energy has been lost and must be recovered.