Recovery of loans resolved through insolvency courts remains low even as the number of cases being admitted is on the rise.
In other words, the country’s insolvency mechanism, the insolvency and bankruptcy code (IBC), has largely remained ineffective when it comes to actual recovery of funds.
IBC was formed in 2016 to address insolvencies which previously took a long time, without offering an economically viable arrangement.
Data in a September report by the ratings and research agency CareEdge showed that the number of cases in April-June FY24 jumped to 6,815, compared to 5,250 in the corresponding quarter last year.
In the same period, data of some of the top lenders showed that recovery has been following a downtrend on a year-on-year (YoY) basis.
The country’s largest bank, the State Bank of India (SBI), recovered Rs 3,607 crore, compared to Rs 5,208 crore last year. Recovery for Bank of Baroda fell to Rs 2,600 crore from Rs 3,014 crore in a year.
Also read: Debt recovery remains a challenge in India, says Deepak Parekh
Punjab National Bank (PNB) also saw a similar trend, wherein its recovery fell to Rs 5,417 crore in April-June FY24 from Rs 7,057 crore in the corresponding quarter last year.
Here, experts said that the process of insolvency is delayed from the company’s end. After this, the process enters the insolvency process where it is further delayed due to several reasons.
In insolvency proceedings, efficiency is often caught between the competing demands of quick resolution, equitable treatment of stakeholders, and the preservation of asset value," said Sonam Chandwani, Managing Partner, KS Legal and Associatess to Moneycontrol on September 21.
Deepak Parekh, Chairman of HDFC Ltd, highlighted that the debt recovery mechanism in India remains a challenge and needs to be tightened.
Also read: 6,571 corporate insolvencies under IBC as of March 2023: IBBI Data
"There is a need for development in the debt recovery system in India. Even after the presence of the National Company Law Tribunal (NCLT) and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), the efficacy of the legal system is not right," Parekh said at the Global Fintech Festival in Mumbai on September 7.
Recovery data
CareEdge data showed that the overall recovery rate till Q1FY24 was 31.62 percent, implying a haircut of approximately 68 percent.
“The cumulative recovery rate has been on a downtrend, decreasing from 43 percent in Q1FY20 and 32.9 percent in Q4FY22 and 31.62 percent in Q1FY24,” the report said.
Under IBC, recovery happens in largely two processes; liquidation or resolution. Liquidation means closing the business of the company or parties involved and distributing the proceeds among the creditors or interested parties. Resolution consists of a detailed plan or a proposal which primarily aims to provide a resolution to the debtor’s case.
Data with the Insolvency and Bankruptcy Board of India (IBBI) showed that liquidation of the registered cases marginally decreased. In the April-June FY23 quarter, 47 percent of the total cases were under liquidation which improved to 45 percent in April-June FY24.
In the same period, resolution of cases jumped slightly from 53 percent to 55 percent.
Also read: Schedule commercial banks recover Rs 47,421 crore via IBC route in 2021-22: RBI report
Moreover, the haircut to the creditors, relative to the fair value of assets, was less 17 percent, while relative to their admitted claims, it is around 68 percent.
A haircut is the lower-than-market and original value obtained on an asset of the concerned party.
What do experts say?
Experts said that the rise in the number of cases and slow recovery is due to multiple reasons. They highlighted that there are cases when old cases are re-filed for the insolvency process through different processes. Additionally, delay from the lenders’ end also contributes to the slow process.
“We have seen examples of old cases being re-filed for different processes. This delays the process as the operations and processes have to be reworked,” said Saurabh Bhalerao, Associate Director and Head, BFSI, CareEdge.
IBBI Chairman Ravi Mital said that sometimes lenders delay the filing process from their end, and this affects the overall process.
“Creditors take 200-400 days to file their application. Delay in filing applications would lead to loss of value of the asset. We are trying to address delays. We are in talks with banks and requesting them to file cases early,” Mittal had said at the 8th National Summit of Insolvency and Bankruptcy Code and Valuation on September 16 in Mumbai.
Additionally, experts said that the insolvency legal system in India is slow, compared to other countries.
"Decisions from the NCLT need to come in quicker. Maybe it is understaffed but that needs to be addressed," Parekh said.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
