Insolvency and Bankruptcy Code Cases Slow Down

Current Affairs National

Posted by newadmin on 2025-01-28 18:33:53 |

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The Insolvency and Bankruptcy Code (IBC), introduced as a pivotal mechanism for resolving distressed debts in India, is witnessing a decline in its effectiveness. Recent trends reveal significant drops in case admissions and recovery rates, raising concerns about the future role of the IBC in the financial sector.

In 2023-24, the Reserve Bank of India (RBI) reported that case admissions to the National Company Law Tribunal (NCLT) reached a six-year low. Only 417 cases were admitted in the first half of the fiscal year, a notable drop from 501 during the same period last year. This trend indicates a growing hesitation among banks to use the IBC for debt recoveries, exacerbated by delays in the admission process.

Recovery rates through the IBC have also plunged to 28% in 2023-24, down from 40% in the previous year. While the IBC prescribes a 14-day timeline for case admissions, the process often drags on for 400 to 600 days, undermining its purpose and contributing to the worsening of non-performing assets (NPAs).

This inefficiency has led to a gradual erosion of confidence among banks. Many creditors now prefer alternative methods such as bilateral settlements and debt assignments, which offer quicker and less costly solutions compared to the lengthy IBC process.

Asset Reconstruction Companies (ARCs) are emerging as a popular alternative for managing distressed assets. Their ability to bypass the delays associated with the IBC is particularly appealing to banks, especially those with smaller claims. Restructuring loans has also become a preferred approach, as many insolvencies arise from temporary liquidity issues rather than chronic mismanagement.

Experts argue that strengthening the operational efficiency of the NCLT is crucial for reviving confidence in the IBC. Increasing the number of benches and streamlining processes, possibly with technology-driven solutions, could lead to faster resolutions. Moreover, providing legal immunity to bankers for their commercial decisions may encourage timely action and prudent risk-taking, ultimately reinforcing the resilience of the banking sector.

While the IBC has instilled a sense of discipline among creditors, its current challenges highlight the need for reforms. Enhancing its operational framework and supporting alternative methods for debt resolution may define the way forward for India’s financial ecosystem.

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