Source: IBBI newsletters

(c) IBC’s primary goal is to rescue and revive firms facing financial stress for various reasons (liquidity crunch, business failure, administrative delay, uneven playing field or any other) and protect the creditors. This is defeated because 75% of the firms undergoing the IBC proceedings have ended up with ‘liquidation’ – the rest 25% in ‘resolution’ (revived or rescued). The high proportion of liquidation is self-defeating. Besides, debt recovery from liquidation is a mere 4.7-5.6% – that is, 94% of money ploughed into 75% firms undergoing the IBC have been lost permanently. Imagine the magnitude of loss to the economy – money for bankers, business setup for entrepreneurs, plant and machinery and jobs etc.

(d) Time is of essence in bankruptcy proceedings. The average time for IBC ‘resolution’ has been going up from 415 days by FY20 to 831 days by FY23 (cumulative). Excluding the time taken by the NCLT (legal resolution), the average time for ‘resolution’ are 375 days and 682 days, respectively. This is against the mandated 270 days – which had to be extended to 330 days in 2019. Every day’s delay progressively devalues assets under bankruptcy and makes recovery more difficult. It is this long delay that explains why the IBC outcomes were first recorded in full only by FY20, although the law came into force in 2016.

(e) During the IBC processes, asset stripping is not allowed (“avoidance transactions”) and supposed to be restored as fast as possible to ensure the firms don’t lose their intrinsic value. By FY22, such transactions were 777, amounting to ₹2.2 lakh crore of which only 48.4 crore or 0.02% had been “clawed back”. By FY23, the number went up to 871, the amount went up to ₹2.85 lakh crore and what was “clawed back” also went up but to mere 1.8%.

What ails IBC?

There are several reasons why the IBC fails to perform to the expectations – other than evasive arguments like a new experiment takes time to deliver. The most important one is political will. By 2018, the government had started diluting it.

This was first revealed by former RBI Governor Urjit Patel, who had suddenly resigned in 2018. In his 2020 book “Overdraft: Saving the Indian Saver” he severely criticised the government for diluting the IBC and the powers of the RBI to regulate stressed assets – after the RBI issued a “revised framework” in 2018 asking banks to start resolution process after a day’s default. He pointed out that this was despite the Supreme Court’s 2019 verdict not finding the RBI’s framework problematic. The same year, then Deputy Governor of RBI Viral Acharya also wrote a book “Quest for Restoring Financial Stability in India”[6], pointing fingers at the government for diluting the IBC (“…forbearance in loss recognition crept in again for some asset classes; and the resolution of several non-performing borrowers under the Insolvency and Bankruptcy Code was stayed”).

The worsening outcomes over the years is reflection of this political back-paddling.

When questioned about the shockingly high haircuts in some cases (90-95%), the government passed the responsibility saying that if a Committee of Creditors (COC) didn’t agree for high haircut it wouldn’t have gone to the NCLT (adjudicator) in the first place and that COC’s wisdom was “supreme” in its reckoning. The panel proposed a code of conduct for the COC and a benchmark for the haircut. Three years down the line, there are no signs of either.

Then there are other problems with the IBC.

An investigating report flagged how all stressed assets are treated as a mere banking problem and ploughed into the IBC as one-stop solution. This leads to many projects (even completed ones) getting scrapped due to lack of buyers and sold at throw away prices. Often, the bidders are few – as reflected in the fact that 75% firms get liquidated and overall debt recovery is 17.6%. At the same time, the government plays favourite and selectively bails out a chosen few. In 2018, when more than two dozen thermal power plants were facing bankruptcy due to problems like unviability of coal (due to cancellation of coal block allocations, rising prices of imported coal, delay in government clearances and coal allocations and delivery of plant machinery etc., the government rescued only three Gujarat-based power plants – Adani Mundra, Tata Mundra and Essar Salaya – for which it set up a special committee which allowed raising tariff and the Gujarat government agreed even when the matter was pending before the Supreme Court.

All these factors combine to make the IBC resolution a happy hunting ground for global funds and firms, even the shadowy tax-haven entities about which the government said it has no information about vis-a-vis the Adan-Hindenburg episode, and a few influential Indian companies to pick and choose from while the vast majority gets sold as scrap.

The IBBI, on its part, periodically announces process improvements, seeks views from experts. For example, three years ago it sought public comments on a code of conduct for COC that the parliamentary panel had desired but it is stuck there. But none of its process improvements have shown up in outcomes (except for the small uptick at the end of FY23).

That is because a few tweaks in the process are not what is needed. What is needed is a serious effort to understand the failing through detailed studies and analysis.

There is a need to appreciate that resolution of stressed asset requires the entire ecosystem – of policies, regulatory mechanisms, banking norms, insulation from political interferences, level-playing field and uniformity and predictability in governance etc. – to improve. The government, banks, including the central bank (RBI) zealously protect the identity of big loan defaulters – in the name of protecting business interests. Even the identity of “willful defaulters” (capable of repaying loans but don’t pay) are protected. This approach needs to change. Transparency is the first step to accountability. Without that banks can go on writing off a large corporate loan defaults as an annual banking ritual and divert the attention away from the real culprits by calling it non-performing assets (NPAs) of banks.

In the meanwhile, imagine the damage the IBC is doing to the economy as thousands of firms end up as scraps.

low debt recoveries

Poor run for IBC continues. What ails it?