Rs 70,000-Crore Bad Loans Recovered Through Insolvency Law In 2018-19: Crisil

Bad loan recoveries in the last fiscal year through the Insolvency and Bankruptcy Code (IBC) route stood at Rs 70,000 crore, posting a recovery rate of 43 per cent, according to a report by credit ratings firm Crisil. The amount was twice compared to the recovery of Rs 35,500 crore through resolution mechanisms such as the Debt Recovery Tribunal and Lok Adalat, the agency noted.

"The recovery rate for the 94 cases resolved through IBC by fiscal 2019 is 43 per cent, compared with 26.5 per cent through earlier mechanisms. What's more, the recovery rate is also twice the liquidation value for these 94 cases, which underscores the value maximisation possible through the IBC process," said Crisil Ratings president Gurpreet Chhatwal.

Exactly three years since it was legislated, the IBC has made material progress in addressing the logjams it was supposed to - which is faster recovery of stressed assets and quicker resolution timelines, Crisil said.

"Recovery through the IBC was Rs 70,000 crore in fiscal 2019 - or twice the Rs 35,500 crore recovered through other resolution mechanisms such as the Debt Recovery Tribunal, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act and Lok Adalat - in fiscal 2018," the report said.

Though keeping to the resolution timeline remains a challenge, the implementation of the IBC process is largely on track, it added.

According to the agency, the IBC has shifted the balance of power to the creditor from the borrower. 

The Code has instilled a significantly better sense of credit discipline, while there is a sense of urgency and seriousness among defaulting borrowers because losing their asset is very much a possibility if the resolution process fails, it said.

It quoted a report of the Insolvency and Bankruptcy Board of India (IBBI) which says that almost Rs 2.02 lakh crore to Rs 3 lakh crore of debt pertaining to 4,452 cases were disposed of even before admission into the IBC process, as the borrowers made good the amounts in default to the creditors.

This gets reflected in slower accretion of new non-performing assets (NPAs or bad loans) in the Indian banking system. Crisil estimates that the banking sector's gross NPA has declined to 10 per cent in end-March 2019, from 11.5 per cent the year before.

The Supreme Court's recent decision to quash the Reserve Bank of India's February 12, 2018, circular does provide banks greater flexibility in resolving stressed assets. But the fact that the top court also simultaneously upheld the IBC in its entirety is a huge positive, observes the report.

Resolution timelines, however, are still an issue. While the average resolution timeline for cases resolved through IBC is 324 days, which is much better compared with 4.3 years - 4 years earlier, it is still above the 270 days set out in the Code.

As on March 31, 2019, there were 1,143 cases outstanding under the IBC of which resolution in 32 per cent of the cases was pending for more than 270 days. Significant delays also trigger liquidation. 

Besides, there are a few big-ticket accounts for which resolution has not been finalised for over 400 days.

Then there are other challenges such as burden on the National Company Law Tribunal to resolve a large number of cases, clarity on priority of claims, limited number of information utilities, and creation of a secondary asset market, which need to be addressed.

"Looking back, we believe that IBC ecosystem is indeed strengthening at a fast pace. Going ahead, success will hinge on timely resolution of stressed assets and a conducive ecosystem," said Nitesh Jain, director, Crisil Ratings.

The stressed assets resolution framework in the country is a work in progress. 

However, IBBI's proactive stance in seeking and acting on feedback from other stakeholders augurs well, as testified by the fact that the IBC has undergone two major amendments already, Crisil said.