Implementation largely on track, though resolution timeline remains a challenge

Exactly three years since it was legislated, the Insolvency and Bankruptcy Code, 2016 (IBC) has made material progress in addressing the logjams it was supposed to – which is faster recovery of stressed assets and quicker resolution timelines.

Recovery through the IBC was ~Rs 70,000 crore in fiscal 2019 – or twice the Rs 35,500 crore1 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 fiscal 2018.

Says Gurpreet Chhatwal, President, CRISIL Ratings, “The recovery rate for the 94 cases resolved through IBC by fiscal 2019 is 43%, compared with 26.5%2 through earlier mechanisms. What’s more, the recovery rate is also twice the liquidation value for these 94 cases, which underscores the value maximisation possible through the IBC process.”

A key economic reform, the IBC has shifted the balance of power to the creditor from the borrower. It has instilled a significantly better sense of credit discipline. Today, there is a sense of urgency and seriousness among defaulting borrowers because losing their asset is very much a possibility if the resolution process fails.

Indeed, as per a report available on the Insolvency and Bankruptcy Board of India (IBBI)’s website, almost Rs 2.02 lakh3 crore of debt pertaining to 4,452 cases were disposed of even before admission into the IBC process, as the borrowers made good the amounts in default to the creditors.

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 on the same date.

The Supreme Court’s decision to quash the Reserve Bank of India’s February 12, 2018, circular does provide banks greater flexibility in resolving stressed assets. But the fact that the apex court also simultaneously upheld the IBC in its entirety is a huge positive.

That said, 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 years4 earlier, it is still above the 270 days set out in the code.

As on March 31, 2019, there were 1,143 cases outstanding under the IBC of which resolution in 32% of the cases was pending for more than 270 days. Significant delays also trigger liquidation. Also, there are a few big-ticket accounts for which resolution has not been finalised for over 400 days.

Then there are other challenges such as burden on the National Company Law Tribunal to resolve a large number of cases, clarity on priority of claims, limited number of information utilities, and creation of a secondary asset market, which need to be addressed.