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NEW DELHI: Insolvency and Bankruptcy Code (IBC) has helped recover ₹2.5 trillion or a third of the admitted financial claims from insolvent firms in about five years, but a big push towards quickening insolvency resolution and maximising recovery is needed, CRISIL Ratings Ltd. said in an analysis on Wednesday.
The rating agency said IBC has marked a significant shift in insolvency resolution and credit culture in the country but the recovery rate and resolution timelines have a lot more room for improvement.
While the IBC has tilted the power equation in favour of creditors from debtors and helped strengthen India’s insolvency resolution ecosystem, its performance against its twin objectives--maximisation of recovery and time-bound resolution--has been a mixed bag, CRISIL said.
Only a few large cases have seen higher recovery. Excluding the top 15 cases by resolution value from the 396 resolved cases, the recovery rate halves to 18%, the analysis said. About 75% of outstanding cases have already been pending for more than 270 days.
“Besides low recovery rate and longer timeframe, a key challenge is the high number of cases going to liquidation. As of 30 June, 2021, nearly one-third of the 4,541 admitted cases had gone into liquidation, with a recovery rate estimated at merely 5%," the analysis said quoting Nitesh Jain, Director, CRISIL Ratings Ltd.
But around three-fourths of these cases were either sick or defunct. With closure of these vintage cases, recovery rate as well as timelines are expected to improve, the analysis said.
“Notwithstanding these challenges, the IBC has played a key role in resolution of stressed assets so far. Its effectiveness will continue to be tested given the elevated level of stressed assets in the Indian financial system," said the analysis.
The government is currently considering amendments to the Code to improve recovery and the time taken for resolution.
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