INSOLVENCY AND BANKRUPTCY CODE (IBC) CASES SLOW DOWN

GS 3 – ECONOMY

The effectiveness of the Insolvency and Bankruptcy Code (IBC), a key mechanism for resolving distressed debts in India, is waning. Case admissions to the National Company Law Tribunal (NCLT) hit a six-year low in 2023-24, and recovery rates for banks have sharply declined, raising concerns about its future role.

Key Trends

• Declining Case Admissions:
  • Only 417 cases admitted in the first half of 2023-24, compared to 501 in the same period last year.
  • Reluctance among banks and delays in the admission process contribute to this decline.
• Lower Recovery Rates:
  • Recovery rates fell to 28% in 2023-24, down from 40% the previous year.
  • Case resolution timelines far exceed the mandated 14 days, often stretching to 400–600 days.
• Erosion of Bank Confidence:
  • Prolonged delays and reduced recoveries push banks towards alternative debt resolution methods like bilateral settlements and debt assignments.

Emerging Alternatives

• Asset Reconstruction Companies (ARCs):
  • ARCs offer faster and more efficient solutions, bypassing IBC delays.
  • Banks with smaller claims increasingly opt for ARCs.
• Restructuring Loans:
  • Restructuring is now preferred, addressing liquidity issues without insolvency proceedings.

Recommendations for Improvement

• Enhance NCLT Efficiency:
  • Strengthen bench capacity and streamline processes.
  • Implement technology for quicker resolutions.
• Strengthen Legal Framework:
  • Grant immunity to bankers for commercial decisions to encourage timely action and prudent risk-taking.

The IBC, while fostering discipline among creditors, must evolve to regain its effectiveness as a tool for debt resolution.