Insolvency and Bankruptcy Code Cases Slow Down

January 27, 2025

The Insolvency and Bankruptcy Code (IBC) has been mechanism for resolving distressed debts in India. However, recent trends indicate a decline in its effectiveness. The Reserve Bank of India (RBI) reported a drop in case admissions to the National Company Law Tribunal (NCLT), reaching a six-year low in 2023-24. Recovery rates for banks through the IBC have also decreased . This shift raises questions about the future role of the IBC in the financial landscape.

Declining Case Admissions

The number of cases admitted under the IBC has fallen sharply. In the first half of the fiscal year, only 417 cases were admitted, compared to 501 in the same period last year.
This decline marks a growing reluctance among banks to utilise the IBC for recoveries.
Delays in the admission process are factor in this trend.

Recovery Rates and Delays

Recovery rates through the IBC have plummeted to 28% in 2023-24, down from 40% the previous year.
The IBC mandates a 14-day timeline for case admissions.
However, the actual process often extends to 400–600 days.
This discrepancy undermines the effectiveness of the IBC and contributes to the erosion of non-performing assets (NPAs).

Erosion of Confidence Among Banks

The declining recovery rates and extended timelines have diminished banks’ confidence in the IBC. Many creditors now prefer alternative methods for debt resolution. Bilateral settlements and debt assignments are becoming more common as banks seek quicker and less costly options.

The Role of Asset Reconstruction Companies

Asset Reconstruction Companies (ARCs) are emerging as viable alternatives to the IBC. They offer a more efficient approach to managing distressed assets. The ability to sidestep lengthy processes associated with the IBC is appealing to banks, particularly those with lower claims.

Importance of Operational Efficiency

Experts emphasise the need for enhanced operational efficiency within the NCLT. Strengthening bench strength and streamlining processes are crucial for improving the IBC’s effectiveness. Incorporating technology-driven solutions could also facilitate quicker resolutions.

Restructuring as a Preferred Approach

Restructuring loans is increasingly favoured over pursuing insolvency. Many insolvencies arise from liquidity issues rather than mismanagement. The IBC has instilled a sense of discipline among creditors, making restructuring a more attractive option for banks and financial institutions.

Strengthening Legal Framework

Providing immunity to bankers for their commercial decisions is another suggestion from experts. This could encourage timely actions and prudent risk-taking, thereby boosting the resilience of the banking sector.

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