Insolvency & Bankruptcy Code (IBC), labelled as among the iconic watershed-moments of Indian legal history has been under intense scrutiny for some time now. Recent observations around judicial delays, higher liquidation rates (compared to resolution) and lower recoveries have cast a spotlight around this milestone.

Some years ago, the IBC was hailed as the saviour of Indian banking. It was reckoned as equally integral to the economy than other legal precedents such as the implementation of GST. In the words of Ravi Mittal, Chief of IBBI (Insolvency and Bankruptcy Board of India), the IBC played a key role in the revival of real estate in the country. In fact, according to India’s Economic Survey for 2024, the IBC which has witnessed 068 resolution plans helping creditors recover Rs 3.6 lakh crores has been integral to the business confidence in the country.

IS IBC RELEVANT TODAY?

In August 2016 when a FICCI-IBA survey published a report indicating an 85% increase in NPAs, the markets developed cold feet. It not only stoked fears among investors and bankers but also caused a furore among the broader markets. The NPA mess among PSBs alone was responsible for causing a Rs 10,000 crore loss to insurance major LIC. The Nifty index scuttled even as leading lenders such as SBI, Bank of Baroda, IDBI, Bank of India, UCO Bank, and Indian Overseas Bank reported quarterly losses.

Post 2016, the IBC has been instrumental in recoveries as well as nudging banks towards better financial discipline. Designed to streamline insolvency resolution and improve debt recovery, the IBC has fundamentally reshaped credit discipline, financial stability, and lending practices. Post IBC, NPAs have come down from 11.2% in March 2018 to 5.9% by September 2022. It has also rid the market of the worries of NPAs. Today, Indian indices such as BSE Bankex or Nifty Bank Index have held their high and are trading confidently. But there was an era when investors shuddered entering banking stocks.

INFUSING CONFIDENCE

Besides empowering banks for a sector-agnostic recovery, IBC has also influenced corporate financial behaviour. There has been significant improvement in areas such as forex hedging, bond credit spreads, and export performance.

Firms are not only aware of the regulation but are also exploring avenues such as hedging to reduce currency exposure risks. According to a 2018 BIS study, the probability of firms engaging in forex hedging increased by 13.7% among companies that previously faced high currency mismatch risks. Research by Khan and Chakraborty (2022) found that exporting firms have significantly benefited from IBC reforms, as improved credit access has helped overcome financial constraints.

IBC may have also reduced bond credit spreads, especially among non-financial entities. A study by Sengupta and Vardhan (2023) highlights that between FY17 and FY20, credit spreads narrowed compared to those observed for finance firms in FY15 and FY16. This suggests growing investor confidence in corporate bonds, driven by the assurance that an efficient insolvency resolution system is in place.

WHAT CHALLENGES PERSIST?

Adoption of the IBC route has been expressed as one fraught with inordinate delays, and lack of transparency. Although the system was robust the process has been marred with several hurdles. In FY24, for instance, the case-load was not only lower than the previous year but actual recoveries too were down by nearly 12 percent. In addition to procedural delays, the total recoveries made has been lower which implies that lenders were looking at rising haircuts.

A report from Care Ratings, for instance, published in November last year found haircuts at nearly 70%. The recovery rate of nearly 30% was from old-cases which implies many lenders are likely to question the success of the IBC.

Sensing delays and several vagaries, the IBC itself has been amended several times – Section 29A (2017), amendment for homebuyers (2018), voting rights and operational credits (2019), pre-packaged insolvency (2021), and NCLT timelines (2023). Additionally, the RBI too has guided Asset Reconstruction Companies (ARCs) and Non-Banking Financial Companies (NBFCs) with policies to streamline recoveries.

From a banking perspective, the IBC has enabled stressed banks to revive accounts through resolution rather than outright liquidation. This improves the chances of asset recovery while maintaining economic stability. Then there’s the one-time settlement (OTS) which has allowed banks to recover a portion of their dues, especially in cases where full recovery is unlikely. The IBC has undoubtedly strengthened India’s public sector banks, reducing NPAs and revitalizing lending confidence.

Given procedural inefficiencies and legal complexities the immediate question to corporate is what more can be done to make IBC stronger? Besides development of frameworks, better clarity of the legal fine-print and making it dynamic could be great considerations. However, as a resolution mechanism, the IBC has already proven its intent to resolve. Moreover additional amendments can be provided to give it more teeth. While we look at it as a milestone, we need to appreciate that this is still a journey.

(Akshat Khetan is a distinguished corporate and legal advisor. He is an expert in M&A, corporate restructuring, and turnaround specialist.)