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Three Years of Insolvency and Bankruptcy

  May 25, 2020

Three Years of Insolvency and Bankruptcy Code (IBC)

What is the IBC?

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.

What are its aims?

The bankruptcy code is a one stop solution for resolving insolvencies which previously was a long process that was not economically viable. The code aims to protect the interests of creditors, enable faster recovery, bring in investment and make the process of doing business less cumbersome

Are its achievements considerable?

It’s three years since Parliament passed the Insolvency and Bankruptcy Code (IBC). It’s the landmark reform of the past five years and has boosted India’s rankings in the World Bank’s ease of doing business. IBC was a much-needed, long-awaited reform which, as records show, is an improvement over the previous tools available to creditors to recover their money from defaulters.

Insolvency and Bankruptcy Code, 2016 (IBC) has made progress in faster recovery of stressed assets and quicker resolution timelines.

Recovery through the IBC was ~Rs 70,000 crore in fiscal 2018-2019 – or twice the Rs 35,500 crore recovered through other resolution mechanisms such as the Debt Recovery Tribunal, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, and Lok Adalat in the same period.

The recovery rate for the 94 cases resolved through IBC by fiscal 2019 is 43%, compared with 26.5% through earlier mechanisms. The recovery rate is also twice the liquidation value for these 94 cases, which underscores the value maximisation possible through the IBC process.

IBC has shifted the balance of power to the creditor from the borrower.

It has instilled a significantly better sense of credit discipline.

IBC induced a sense of urgency and seriousness among defaulting borrowers because losing their asset is very much a possibility if the resolution process fails. As per a report available with Insolvency and Bankruptcy Board of India (IBBI), almost Rs 2 lakh crore of debt pertaining to 4,500 cases were disposed of even before admission into the IBC process. This gets reflected in slower accretion of new non-performing assets (NPAs) in the Indian banking system. CRISIL estimates the banking sector’s gross NPA (aggregate) has declined to 10% in end-March 2019 from 11.5% the year before.

Specify the reasons for the less than satisfactory performance of IBC?

Resolution timelines are still an issue. While the average resolution timeline for cases resolved through IBC is 324 days, which is much better compared with 4.3 years earlier, it is still above the 270 days set out in the code.

The track record in bad loans resolution has been less than satisfactory owing to a variety of factors:

1. Cases are mired in litigation,

2. Timelines haven’t been adhered to,

3. The law itself has been amended twice  

4. Bankruptcy infrastructure hasn’t been strengthened as needed for quicker and effective resolution

5.  Burden on the National Company Law Tribunal to resolve a large number of cases and

6.  Limited number of information utilities.

Given all this, the stressed assets resolution framework in the country is a work in progress.