When a business turns sick, it starts defaulting on its loan payments and the creditor tries to recover the debt through various means. The recovery process is essential on two counts – one, to recover the maximum amount possible from the defaulter, and two, to do it as soon as possible so that the amount can be freed-up to issue fresh credit. Poor recovery of claims and inordinate delays in resolving bad assets were the problems that plagued the older recovery mechanisms such as SARFAESI, Lok Adalats, and Debt Recovery Tribunals.
In 2016, the Insolvency and Bankruptcy Code was passed to tackle the mounting bad debts and to favour the creditor during the resolution process. While the IBC’s performance has been relatively better than the other recovery mechanisms, it suffers from similar systemic issues. For instance, of the 2,600 cases that were closed by December 2021, 55% ended in liquidation while only 16% were completed with proper resolution plans approved by the lender. The resolution process is also marred by delays. On average, over 700 days were taken in FY22 to complete a resolution process, against the stipulated deadline of 330 days. Moreover, during the fourth quarter of FY22, the amount to be realised from the resolution process was lower than the liquidation value of assets. Worryingly, the lenders continued to take steep haircuts. The haircut is the debt foregone by the lender as a share of the outstanding claim. In 100 out of 500 companies that saw proper resolutions, the haircuts were above 90%.
