Saturday, February 22, 2025

IBC cases slow down as banks reconsider recovery approach

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The Insolvency and Bankruptcy Code (IBC), once hailed as a transformative resolution mechanism, is witnessing a slowdown in case admissions, with banks showing reluctance to tap this channel for recoveries. While the IBC remains the dominant tool for resolving distressed debts, delays in case admissions and diminishing recovery percentages are prompting a reassessment of its effectiveness.

According to Reserve Bank of India (RBI) data, the number of cases admitted under the IBC in 2023-24 dropped to a six-year low, including two Covid-affected years. Recovery rates for banks through the IBC channel plummeted to 28 per cent in 2023-24, down from 40 per cent in 2022-23, reflecting growing concerns over the value erosion of non-performing assets (NPAs) during prolonged delays. In the first half of this fiscal, the number of cases admitted in NCLT stood at about 417, compared to 501 cases in the same period last fiscal. 

Delays in Admission

The IBC prescribes a 14-day timeline for admitting cases, but in reality, the process often takes 400–600 days, or roughly 14 months. The gap between prescribed and actual timelines is adversely affecting recoveries.

Hari Hara Mishra, CEO of the Association of Asset Reconstruction Companies (ARCs) in India, highlights the urgency of addressing these delays.

“Delays in case admissions are leading to significant NPA value erosion, undermining the efficiency of the IBC. The process must become non-discretionary, potentially by integrating non-disputed default data from Information Utilities (IUs) into the NCLT database for auto-admission,” Mishra said.

Erosion of Confidence

The declining recovery rates and extended timelines have made banks hesitant to rely solely on the IBC for recoveries. While the mechanism remains dominant, its inability to deliver timely resolutions has created an opportunity for alternate approaches, such as Asset Reconstruction Companies (ARCs).

Sushmita Gandhi, Partner, IndusLaw, said, “While it cannot be denied that some banks with lower claims and stakes may find the delays under IBC a reason to avoid IBC I think the more important reason is the change in the way banks are now looking to resolve debts which is by bilateral settlements or assignment of debts”.

There has been an overall economic recovery post the Covid-19 pandemic which has allowed many companies to avoid insolvency which may have consequently reduced the defaults for insolvency actions, she said.

“Creditors (especially banks and financial institutions) have started to increasingly focus on restructuring loans and negotiating settlements to sidestep IBC which some may find lengthy and often expensive”, Gandhi said.

However, while the recovery percentage may have dropped, IBC remains the dominant method as a recovery and restructuring channel and a faster and more efficient process compared to traditional litigation channels, allowing banks to resolve non-performing assets (NPAs) more effectively, Gandhi added. 

 Srinath Sridharan, a corporate advisor, underscored the need for a more diversified approach. “The IBC has played a crucial role in improving the asset quality of banks and facilitating pre-admission settlements. However, delays in the NCLT’s decision-making process underscore the importance of ensuring adequate bench strength and urgency,” he said.

Sridharan added that ARCs provide a viable alternative for managing distressed exposures without the lengthy delays or haircuts that often accompany the IBC process.

Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas & Co. said that looking at IBC as a tool for recovery and not as a resolution, which it was always meant to be, is the primary problem when one assesses the efficacy of IBC as a tool of recovery for banks.

“Especially in cases where the insolvency is merely on account of liquidity constraints and not mismanagement/siphoning of funds, restructuring is the preferred approach for banks and financial institutions”, she said.

“The key change that IBC achieved is the aspect of discipline and respect for creditors from promoters and entrepreneurs. Having achieved this, restructuring, for which RBI gives significant leeway, is most popular.”

Strengthening Framework

Experts agree that strengthening the operational efficiency of the National Company Law Tribunal (NCLT) is critical. Adequate bench strength, streamlined processes, and technology-driven solutions are key to making the IBC a more effective recovery tool.

Another important factor is the provision of immunity to bankers for commercial decisions. “Providing bankers with immunity for their decisions will encourage prudent risk-taking and timely action, strengthening the resilience of the banking sector,” Sridharan noted.







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