The Insolvency and Bankruptcy Code (IBC), once a pivotal tool for resolving distressed assets in India, is experiencing a slowdown in case admissions. Banks are increasingly hesitant to utilize this channel due to diminishing recovery rates and prolonged resolution timelines. This shift has led financial institutions to explore alternative recovery methods.
Why Are Recovery Rates Declining Under the IBC?
Recent data highlights a significant decrease in recovery rates through the IBC. The Reserve Bank of India (RBI) reports that recovery rates for banks via the IBC channel dropped to 28% in the fiscal year 2023-24, down from 40% in 2022-23. This decline raises concerns about the erosion of non-performing assets (NPAs) during extended resolution periods. Additionally, the number of cases admitted to the National Company Law Tribunal (NCLT) stood at approximately 417 in the first half of the current fiscal year, compared to 501 cases during the same period in the previous fiscal year.
What Challenges Are Prompting Banks to Reassess the IBC?
Several factors contribute to banks’ reevaluation of the IBC as a primary recovery tool:
Admission Delays: The IBC prescribes a 14-day timeline for admitting cases; however, the actual process often extends to 400–600 days, leading to significant NPA value erosion. Hari Hara Mishra, CEO of the Association of Asset Reconstruction Companies (ARCs) in India, emphasizes the need to address these delays to prevent further asset depreciation.
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 at IndusLaw, notes that banks are increasingly focusing on restructuring loans and negotiating settlements to sidestep the often lengthy and expensive IBC process.
What Alternative Recovery Methods Are Banks Considering?
In response to these challenges, banks are exploring alternative strategies:
Restructuring and Settlements: Financial institutions are prioritizing loan restructuring and bilateral settlements over initiating insolvency proceedings, aiming for more efficient resolutions. This approach is particularly favored in cases where insolvency stems from liquidity constraints rather than mismanagement. Veena Sivaramakrishnan, Partner at Shardul Amarchand Mangaldas & Co, highlights that restructuring has become the preferred approach for banks and financial institutions, especially when insolvency is due to liquidity constraints.
Asset Reconstruction Companies (ARCs): ARCs offer a viable alternative for managing distressed exposures without the lengthy delays or significant haircuts often associated with the IBC process. Srinath Sridharan, a corporate advisor, underscores the importance of ARCs in providing more streamlined recovery options.
The evolving landscape of debt recovery in India reflects banks’ adaptive strategies in response to the challenges posed by the IBC’s declining efficacy. By embracing alternative recovery methods such as loan restructuring and collaboration with ARCs, financial institutions aim to enhance the efficiency of distressed asset resolutions, thereby mitigating the adverse impacts of prolonged insolvency proceedings.
Summary of the news
Why in News | Key Points |
---|---|
Banks Reevaluate Recovery Strategies Amid Declining IBC Effectiveness | IBC recovery rates dropped to 28% in FY24 (down from 40% in FY23). |
Declining IBC Cases | Number of cases admitted to NCLT dropped from 501 in H1 FY23 to 417 in H1 FY24. |
Challenges with IBC | Average resolution time increased from 324 days to 653 days. |
Alternative Recovery Methods | Banks shifting focus to loan restructuring, bilateral settlements, and Asset Reconstruction Companies (ARCs). |
RBI Data | Recovery rate for banks under IBC fell from 43% in 2019 to 32% in 2023. |
Asset Reconstruction Companies (ARCs) | ARCs are becoming a popular choice for managing distressed assets due to faster resolution. |
Important Figures | Hari Hara Mishra (CEO, ARCs), Sushmita Gandhi (Partner, IndusLaw), Veena Sivaramakrishnan (Partner, Shardul Amarchand Mangaldas & Co), Srinath Sridharan (Corporate Advisor). |
IBC Timeline Issue | IBC prescribes a 14-day timeline for case admission but often takes 400-600 days. |