{"id":133828,"date":"2021-09-14T20:45:02","date_gmt":"2021-09-14T15:15:02","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=133828"},"modified":"2021-09-16T17:50:37","modified_gmt":"2021-09-16T12:20:37","slug":"criticism-of-the-ibcs-recovery-record-is-unwarranted","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/criticism-of-the-ibcs-recovery-record-is-unwarranted\/","title":{"rendered":"Criticism of the IBC\u2019s recovery record is unwarranted"},"content":{"rendered":"\n

Synopsis<\/strong>: The Insolvency and Bankruptcy Code (IBC), which was promoted as a panacea to the problem of bad loans, has been attacked as being ineffective at best and counterproductive at worst. It requires a more nuanced debate.<\/p>\n

Introduction<\/strong><\/h5>\n

In recent months, a landmark economic reform of the last decade has come under criticism from various quarters.<\/p>\n

However, a reform as radical and complex as this deserves a more objective and data-intensive evaluation.<\/p>\n

Why the criticism of IBC is unwarranted?<\/strong><\/h5>\n

Arbitrary assumptions<\/strong>: In any bankruptcy process, recoveries are impacted by a host of macroeconomic and firm-specific factors. According to Reserve Bank of India (RBI) data,<\/strong> for the three years, recoveries averaged around 45%.<\/strong> Many have criticized the IBC by arbitrarily declaring this number as low.<\/p>\n

Biased opinions<\/strong>: To truly evaluate the IBC on recoveries, one would require a diversified data set<\/strong> about several industries and business cycles. Since such data is not available yet, an evaluation of the IBC on recoveries is likely to be biased.<\/p>\n

Absolute numbers are meaningless<\/strong>: Critics must be reminded that, every process can have a distribution of outcomes.<\/p>\n

Wide variation in recovery rates is true for any bankruptcy process<\/strong>: Journal of Financial Economics, 2007, find that for US corporate bankruptcies between 1982 and 1999, the average recovery rate was 51.1% and the standard deviation of this rate was a large 36.6%.<\/p>\n

A, special report by Moody\u2019s shows that the average recovery rate in US bankruptcies between 1982 and 2010 was 59.6% for first-lien bank loans, 37.4% for senior unsecured bonds and 25.3% for senior subordinated bonds.<\/p>\n

Poorly incentivized banking system<\/strong>: Most loans in India are issued by uninformed and poorly incentivized \u2018sarkari\u2019 bankers, and the issuance of such loans often based on political influence and corruption.<\/strong><\/p>\n

What is the way forward?<\/strong><\/h5>\n

Using benchmarks<\/strong>: First, for robustness, we can use several benchmarks to evaluate recoveries under the IBC and arrive at a less biased estimate of its effectiveness.<\/p>\n

Second, use recovery proportion under alternate mechanisms as benchmark<\/strong>. As RBI data shows, average recoveries for asset reconstruction companies (ARCs) under SARFAESI Act surpassed those under IBC just once in the 17-year period, and have largely languished under 30% during this period.<\/p>\n

Therefore, to the extent that data is available, IBC recovery rates have not been abnormally low, but in fact higher than historical averages of alternate resolution mechanisms.<\/p>\n

Source:<\/strong> This post is based on the article \u201cCriticism of the IBC\u2019s recovery record is unwarranted<\/strong>\u201d published in Livemint<\/strong> on 14th<\/sup> September<\/strong> 2021<\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Synopsis: The Insolvency and Bankruptcy Code (IBC), which was promoted as a panacea to the problem of bad loans, has been attacked as being ineffective at best and counterproductive at worst. It requires a more nuanced debate. Introduction In recent months, a landmark economic reform of the last decade has come under criticism from various… Continue reading Criticism of the IBC\u2019s recovery record is unwarranted<\/span><\/a><\/p>\n","protected":false},"author":10316,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[8671,216,3605,869],"class_list":["post-133828","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-changes-in-industrial-policy","tag-gs-paper-3","tag-ibc","tag-insolvency-and-bankruptcy-code","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704931836},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/133828","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10316"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=133828"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/133828\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=133828"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=133828"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=133828"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}