Speed and capacity – Restoring trust in IBC must be a priority

Source: The post is based on the article “Speed and capacity – Restoring trust in IBC must be a priority” published in Business Standard on 29th December 2022. 

Syllabus: GS 3 – Indian Economy

Relevance: concerns associated with the Insolvency and Bankruptcy Code (IBC). 

News: The Reserve Bank of India has released the “Trend and Progress in Banking Report for 2021-22”. It highlights the performance of the Insolvency and Bankruptcy Code (IBC). 

What is IBC? 

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What are the key highlights of the report? 

As per the report, recovery rates were not higher than those achieved under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act or the debt recovery tribunals.  

However, it also highlighted that IBC has achieved remarkable results in liquidation value of the assets in the bankruptcy system till the second quarter of 2022-23. 

The report further said that the reasons behind low liquidation value might be because the entities entering the IBC have already undergone significant value destruction of asset holdings. 

This highlights the concerns and overall effectiveness of the IBC. 

What are the concerns with the IBC? 

The idea of the IBC was to provide a swift resolution. This would have helped financial creditors looking to preserve the value of their assets to move swiftly into the process before making value destruction of assets. 

However, understaffing, particularly, in the National Company Law Tribunal (NCLT) has caused delays within the IBC.  

Understaffing has led many banks towards handing stressed assets that could have been recovered by the National Asset Reconstruction Company Ltd (NARCL). 

The current time for resolution is around 680 days compared to 230 days in 2017-18 when the IBC was new. Almost two-thirds of the cases have gone beyond the mandated nine months. 

Therefore, the government has failed to adequately highlight, capitalise and invest in its own major reform which has caused it to underperform. 

What can be the way ahead? 

Even though the government has stated that it does not have any plans to bring reforms to IBC to speed up the resolution process, it has to ensure that the IBC returns to time-bound performance.