Effectiveness of IBC, 2016 – A Performance Appraisal of IBC

Source: The post effectiveness of IBC, 2016 has been created, based on the article “A performance appraisal of IBC” published in “Business standard” on 16th January 2024.

UPSC Syllabus Topic: GS Paper 2 – Polity – Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

News: The article discusses the effectiveness of India’s Insolvency and Bankruptcy Code (IBC), 2016. It evaluates how well the IBC resolves financial distress in companies, improves bank balance sheets, and benefits the economy, despite some challenges in efficiency and asset value realization.

What is Insolvency and Bankruptcy Code (IBC)?

The Insolvency and Bankruptcy Code was enacted in 2016, and it replaced all the existing laws with a uniform procedure to resolve insolvency and bankruptcy disputes. The code aimed to address the issue of Non-performing Assets (NPAs) and debt defaults.

For mor information on IBC read here

What is The Impact of The IBC on Banks and Economy?

Reduction in Non-Performing Assets (NPAs): The IBC helped decrease the NPA rate of banks significantly, from a peak of 14.8% in September 2018 to a low of 3.2% by September 2023.

Increase in Bank Profits: Banks experienced a remarkable turnaround, recording a historic profit of €2.63 trillion in 2022-23, compared to a loss in 2017-18.

Improvement in Corporate Balance Sheets: Post-IBC, firms showed enhanced performance with more robust balance sheets, better leverage management, and an improved interest coverage ratio exceeding 3.5.

Enhancement in Corporate Governance: There was a notable improvement in corporate governance, indicated by a reduction in related party transactions, as identified in a study post-IBC.

Global Ranking Improvement: India’s ranking in global insolvency resolution improved drastically, moving from 136th to 52nd within the first three years of the IBC’s implementation.

What Are The Concerns Related to IBC?

Inefficient Time Management: The resolution processes under IBC are prolonged, averaging 867 days, far exceeding the intended 180 days.

Gap in Asset Value Maximization: Resolutions are realizing only 86% of the fair value of the companies, indicating a shortfall in achieving the desired value maximization.

High Incidence of Liquidation: The IBC results in more liquidations than rescues, particularly impacting companies that were already sick or defunct at the time of entering the process. Most companies going into liquidation were already sick or defunct, having assets valued at about 5% of their claims.

Methodological Issues in Appraisal: Some appraisals of the IBC’s performance use flawed methodologies, like focusing solely on recovery rates, which overlook other important factors like realizations from equity holdings or the resolution of guarantors.

How to Improve Insolvency and Bankruptcy Code

To improve the Insolvency and Bankruptcy Code (IBC), stakeholders like the government, adjudicating authority, debtors, creditors, and professionals should play their roles more effectively. This does not require legislative changes but rather better implementation and adherence to the IBC’s processes, particularly in ensuring time-bound resolutions and maximizing the value of stressed assets.

Question for practice:

Evaluate the impact and effectiveness of India’s IBC in improving the economy, considering NPAs, bank profits, corporate balance sheets.