IBC helps resolve ₹26 lakh crore in debt over 9 years: CRISIL

The Insolvency and Bankruptcy Code (IBC) has enabled the resolution of debt worth ₹26 lakh crore over the past nine years, according to a recent report by CRISIL. Introduced in 2016, the IBC has become a key instrument for addressing corporate distress and improving credit discipline. However, stretched timelines and limited success in certain sectors suggest that further interventions may be necessary, the rating agency said in its report.

Since 2016, IBC has enabled the direct resolution of ₹12 lakh crore of debt for around 1,200 cases of stressed borrowers. Besides, it has also created significant deterrence amongst borrowers leading to the settlement of 30,000 cases with ₹14 lakh crore of debt even before applications made to the National Company Law Tribunal (NCLT) were admitted.

“While IBC has been periodically amended to further enhance its efficiency, stretched timelines and limited success in implementation for certain sectors may need some more interventionsm” the report said.

CRISIL noted that the primary shift brought about by the IBC has been the transition from a debtor-in-control model to a creditor-in-control framework, setting it apart from earlier debt resolution mechanisms such as the Debt Recovery Tribunal (DRT), Lok Adalat, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

IBC accounts for one-fourth of total debt resolution

Since its implementation in 2016, of the total resolved debt of around ₹48 lakh crore across various mechanisms, the IBC has delivered the highest average recovery rate of 30-35%, compared to around 22% for SARFAESI, 7% for DRT, and 3% for Lok Adalat.

“One-fourth of the total debt resolved since 2016 has been through the IBC, which has achieved the highest recovery rate among the various debt resolution mechanisms seen till date and contributed 50% to total recovery,” said Mohit Makhija, Senior Director, Crisil Ratings.

Aided by its deterrence effect, IBC will remain the preferred route for debt resolution in the days ahead as well. The improved economic viability of infrastructure and manufacturing assets makes them lucrative for investors to acquire and turn around under the IBC, he said.

“Further, small- to mid-sized assets, which form 85% of the IBC's unresolved pipeline, are likely to attract investors with varied risk appetites,” he added.

The relative success of the IBC is also attributed to the flexibility it provides creditors to replace management of viable businesses and restructure debt while maintaining them as going concerns. These features, coupled with the improved economic environment over past three fiscals, have boosted investor interest, especially in the infrastructure and manufacturing sectors, as per the report.

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% of all resolution approvals since the IBC’s introduction, it represented only 40% of the total debt. Higher number of eligible investors which qualify to participate in bids will keep the demand for these small-to-mid sized distressed assets intact,” CRISIL mentioned in its report.

Measures to enhance efficiency

As per the report, a major challenge in debt resolutions under the IBC has been the significant backlog of cases at the NCLT, primarily caused by procedural delays at various stages and cross-litigations among stakeholders. These factors have pushed resolution timelines far beyond the initially envisaged duration, averaging 713 days as of the last fiscal, compared to the regulatory mandate of 330 days.

In a bid to address these issues, the Insolvency and Bankruptcy Board of India (IBBI) has taken several measures, including increasing the bench strength of the NCLT, allowing online submission of routine filings by resolution professionals, and enabling part-wise resolution of corporate debt.

Additionally, the IBBI has identified specific challenges in the IBC process concerning the real estate and micro, small, and medium enterprise (MSME) sectors. The real estate sector faces complexities such as cross-collateralisation and disputes with land authorities, while MSMEs suffer from a lack of clear categorisation. Revival efforts through the “pre-pack” framework have also struggled to gain traction in the MSME space, the report highlighted.

Following multiple discussion papers and consultations with expert committees, the IBBI has introduced sector-specific amendments aimed at streamlining the resolution process, with the objective of improving timelines and enhancing recovery prospects.

“Increasing the NCLT bench strength by 15 judicial members will help reduce the backlog of 7,000 cases pending with the tribunal as of last fiscal. Furthermore, recent amendments targeting the real estate sector may expedite the resolution of 200 cases, with total admitted claims of ₹70,000 crore, which have been pending for an average of 2.5 years,” said Tanvi Fifadra, Associate Director, Crisil Ratings.

“However, the slow progress on MSME debt resolution, with only eight cases resolved through pre-pack, remains a concern for stakeholders,” Fifadra added.

While the IBC has become the primary legal framework for debt resolution in India, the effectiveness of the recent amendments in achieving its objective of time-bound resolution will bear watching.