By Aniket Dani
The Insolvency and Bankruptcy Code, 2016 (IBC) has accelerated recoveries and transformed the way banks handle non-performing assets (NPAs) in India. By prioritising resolution over liquidation, it has spurred banks to shift from lengthy legal battles to a proactive, pragmatic and creditor-led approach that maximises the value of distressed assets.
However, recovery rates under the regime can experience a considerable boost if a time-bound process is more rigorously enforced.Continuous improvements are needed to curtail process delays, overburdened courts, and creditor reluctance and ensure the resolutions catch up with global standards.
How IBC has helped improve resolutions
As of March 2024, the gross NPA (GNPA) ratio of banks stood at Rs 4.8 trillion, or 2.80% of the loans outstanding – at a historical low.
That marks a sharp reduction of ~54% from the peak of the ratio at 11.6% in fiscal 2018, at Rs 10.4 trillion. Over this period, under the IBC, NPAs related to over 900 companies were resolved, recovering Rs 3.4 trillion (accounting for ~60% of the decline in GNPAs).
As of June 2024, the average recovery rate was 32% (since inception) through resolution and 6.3% through liquidation. Notably, in the cases of recovery through resolution, the total amount realised was 1.61 times greater than the total liquidation value of the recovered assets, underscoring the fact that resolution provides a more efficient outcome and should be maximised for future cases.
According to the data, the share of number of cases resolved through the resolution plan rose to 38% in fiscal 2024 from 17% in fiscal 2018. Further, the timely recovery directly correlates with the percentage of recovery, i.e., early resolution, leading to higher recovery percentage (covered in the following section).
Number of cases resolved
In fiscal 2024, manufacturing and real estate sectors accounted for the largest share of approved resolution plans, a trend that continued in the first quarter of fiscal 2025 with a combined 74% share. With healthy growth prospects in these sectors, creditor interest is likely to remain strong.
Timely resolution still eludes in many cases
Data indicates that resolutions completed within 330 days resulted in a 49% recovery rate under the IBC, while those resolved between 330-600 days achieved a 36% recovery rate. In contrast, resolutions that dragged beyond 600 days resulted in a substantially lower 26% recovery rate.
Despite the 180+90-day deadline, legal challenges, adjournments, promoter objections and overwhelming case volumes in the National Company Law Tribunal (NCLT) have pushed timelines. Moreover, the absence of a unified mediation platform for promoters and lenders has slowed down the process even further.
As of June 2024, 68% of ongoing Corporate Insolvency Resolution Processes (CIRPs) are over 270 days old, with the average times to resolve being 685 days (closure through resolution) and 499 days (closure through liquidation), far exceeding the permitted 330-day maximum. Delaying resolution can result in deterioration of the asset’s value, leading to lower recovery rates for creditors.
Strengthening the code is imperative
Alongside the stretched timelines in resolving cases, the lack of capacity for handling liquidation and the challenges faced by insolvency professionals and valuers in complex cases also slow down the process. Furthermore, the absence of a clear framework for dealing with cross-border insolvency and unique sector-specific challenges, such as regulatory complications in real estate, power, and infrastructure sectors, add to the complexity.
To address these challenges, an integrated technology platform has been proposed to ensure consistency, transparency, and timely processing. Currently, the NCLT has 15 benches. To expedite the process, the finance minister has proposed reforms to the NCLT, including establishing new tribunals focused on cases under the Companies Act, 2013, appointing additional members, and introducing pre-packaged insolvency resolution for ‘micro, small and medium enterprises’, and exploring ways to encourage out-of-court settlements to minimise haircuts and lengthy proceedings.
The government has made six amendments to the IBC since its inception and 12 amendments to regulations and model byelaws, resulting in about 86 changes to the regulatory framework.
More needed to catch up with global standards
Despite significant improvements, IBC lags global peers in speed, recovery rates, and judicial efficiency. In contrast to the IBC’s average timeline of over 600 days, countries such as the UK, US, and Singapore typically resolve cases within a year. Recovery rates through resolutions under IBC average 30-40%, compared with the recoveries for first lien debt in range of 60-70%, second lien debt in range of 40-45% and unsecured fund debt between 30-40% in the US under Chapter 11 and the UK’s higher recoveries.
Developed economies have more predictable and flexible legal frameworks, allowing for out-of-court settlement and faster restructuring without lengthy court battles.
Since the introduction of IBC, India has improved its Ease of Doing Business ranking (basis World Bank report 2020), particularly in ‘Resolving Insolvency’, from 136 in 2016 to 52 in 2020. However, developed countries consistently rank higher due to their established frameworks and stronger recovery mechanisms.
To become more competitive, the IBC needs continuous reforms and adaptation. By addressing challenges such as process delays, overburdened courts, and creditor reluctance towards haircuts, India can bridge the gap with mature frameworks such as those in the advanced economies.
Aniket Dani is Director- Research at CRISIL Market Intelligence and Analytics.