Cents On The Dollar: Who Is Responsible For The Low Recoveries At IBC?

About 89 months since the introduction of the Insolvency and Bankruptcy Code, lenders are still grappling with low recoveries and inordinate delays in resolution of corporate stress.

But, who is responsible for this? Is it the judiciary, which oversees repeated delays in admission? Is it financial creditors, who regularly delay the resolution process way beyond the 330-day time limit? Is it promoters, who come up with constant legal hurdles for anyone daring to drag their company through insolvency?

Like with most things, the answer is not black or white.

According to data released by the Insolvency and Bankruptcy Board of India, out of creditor claims worth over Rs 10.46 lakh crore, IBC has managed to ensure recoveries worth Rs 3.35 lakh crore, as of March 31. That amounts to a recovery rate of a little over 32%.

Now, it is probably easy to equate claims with outstanding debt to the banking system. But, that would be a flawed comparison to begin with. A claim, by definition, is a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured.

To simplify the legalese, a claim is whatever a creditor says is owed to them. It may include outstanding debt, excess interest, punitive charges, and capitalisation of such punitive charges, among other things.

Thus, claims are charges at a given point in time in the past, while the recoveries are based on what is the realisable value today. If you were to take IBBI's estimates, the recovered money as of March 31 represents nearly 85% of the realisable value of the assets at the time of resolution.

Be that as it may, there is something to be said about why the realisable value has fallen so much.

Judicial Delays

In a post on social media platform X (formerly known as Twitter), Kotak Mahindra Bank Ltd.'s former MD and CEO Uday Kotak noted that the low recoveries are a function of judicial delays.

IBC resolution at 32% of claims. It means 68% lost with no interest post claim admission. Main reason is delay in admission to NCLT and time taken there. If we quicken that recovery % improves.
IBC has brought benefits of creditor being in control and corporate accountability.

May 28, 2024

While there is no current data on how long it takes for a National Company Law Tribunal to admit a case, the number stood at 650 days as of March 2022. To be sure, the IBC dictates a 14-day period for the NCLT to admit or reject an insolvency application.

"There is some level of discretionary decision-making happening at courts when it comes to IBC. This needs to be resolved at the earliest. The NCLT's job is to simply determine if there has been a default and then admit the case. It is not clear why that should take any longer than 14 days," said Abizer Diwanji, head of financial services at EY.

Another issue causing judicial delays is the lack of adequate bench strength at the NCLT. Currently, across 30 benches, there are 52 members hearing cases at the quasi-judicial body. This is less than the sanctioned bench strength of 62.

"...in order to tackle the huge pendency of more than 20,000 cases in NCLT at the end of every year, the sanctioned strength of NCLT needs to be enhanced," the Standing Committee on Finance for FY24 had said in its report in February

Till date, the NCLT bench strength has never reached its complete sanctioned number.

Judicial delays also come owing to legal objections filed by promoters. This not only adds to the resolution time, but also ends up scaring away strong buyers who fear future meddling on the part of the promoters.

Creditor Delays

While judicial delays are a reality, the time taken by the lenders is also a major contributor to delays. According to data available with the IBBI, the average time for resolution of an admitted insolvency case stood at 679 days in FY24.

This number includes any additional delays due to court-approved extensions to the resolution process. Without such additional days, the average period for resolution stood at 565 days. This compares with a maximum limit of 330 days mandated under the IBC.

According to a resolution professional, who works with financial creditors, this is owing to chaotic resolution proceedings. This may include lack of consensus among different groups of financial creditors, lack of executive will to take tough decisions, entertaining late bidders and fear of legal repercussions.

An example of this is the resolution of Reliance Capital Ltd. The RBI had placed Reliance Capital under insolvency in November 2021, superseding its board. After over a year, the resolution process caught some steam with Torrent Investments outbidding Hinduja Global and Oaktree Capital in December 2022.

The process then went into tailspin, after Hinduja Global submitted a higher bid after the deadline for bidding was concluded. Lenders entertained the higher bid, forcing the resolution process to be reopened. Another round of bidding and negotiations with prospective bidders followed. In the final round of bidding, Hinduja Global won unchallenged, but it was not until July 2023 that the plan was submitted to the NCLT for final approval.

It did not end there though. After approvals from the NCLT were received in February, Hinduja Global sought to change aspects of its plan, which continues to remain in abeyance.

Case For Realistic Expectations?

Beyond the issue of delayed resolution, stressed asset management must also be looked at from the lens of the quality of assets being resolved. Right after its inception, IBC got a boost because of RBI's decision to refer 12 of the largest corporate default cases being thrown into the mix for resolution.

This move ensured that large corporate cases, with potential for large recoveries, were among some of the test cases for the insolvency mechanism in India. However, since then, the stock of new bad loans has come down.

According to the IBBI, out of 947 cases resolved as of March 2024, 375 cases, or 40%, were those which were already defunct or been through the Board for Industrial and Financial Reconstruction. This figure was 37% as of March 2023.

These are typically old stressed cases, where the expectation of recovery is considerably lower. This is because either the assets owned by these companies are in defunct status or the businesses have been in suspension for so long that no realistic recovery can happen.

As resolution progresses and stock of fresh NPAs fall, the ratio of defunct cases will continue to rise, bringing down overall recovery rates, the managing director of a large public sector bank said, on the condition of anonymity.

As of March 2024, the estimated gross NPA ratio for scheduled commercial banks fell to 3%, the lowest it has been in decades, according to ICRA.

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