In cases where corporate insolvency resolution processes (CIRPs) were started under the Insolvency and Bankruptcy Code by monetary creditors (FCs), realisations up until September 2022 were close to 201 per cent of the liquidation worth, according to information released in the Reserve Bank of Indias (RBIs) Trend and Progress Report for 2021-22. The report also kept in mind that SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) and Debt Recovery Tribunals have actually yielded recovery rates equivalent to the IBC system.

As of the most recent information for 2021-22, the recovery rate under the IBC stood at 23.8 percent, while the rates under SARFAESI Act and DRTs stood at 25.7 percent and 22.5 per cent, respectively. The report stressed the contrast of realised value with confessed claims might not be an affordable indicator of the efficiency of the insolvency resolution procedure because stressed entities being referred under the IBC might have undergone significant worth destruction currently.

Rather, the resolution value should be compared to the liquidation value of the stressed assets, the report stated. Recently, concerns have been raised over the declining rate of recovery in contrast with the claims admitted through the IBC system.

Safeguarding the mechanism, the RBI said the level of hairstyle represents the discount the market needs for obtaining a stressed out entity as a going issue. Also, the rate of recovery is contingent on several elements, including the general macroeconomic environment, perceived growth prospects of the entity and its sector, and the degree of erosion in the intrinsic worth of the entity.

As a broad-based recovery gains traction, these elements are most likely to turn favourable for financial resolution, the RBI report said.The reserve bank likewise pitched for extending the pre-packaged insolvency resolution process, which is presently allowed for micro, little, and medium enterprise (MSME) customers, to all customers. This mechanism, which is enabled just for MSME borrowers, may efficiently match the prudential structure of the Reserve Bank, if reached all customers, it said. According to data, the pre-pack insolvency resolution process, introduced for MSMEs in April 2021, is yet to gain traction and just 2 cases were confessed through this channel until September 2022. The RBI likewise stated the group resolution structure could help enhance the efficacy of the IBC.

In India, credit agreements are typically ingrained with cross obligations and credit threat mitigation covers offered by parent and group business of the customer.

In such a system, a default by one customer is likely to spur cross defaults by group business, therefore increasing the total credit threat to the financial system, the RBI said. It noted that the time taken for admission of resolution applications, in addition to the last resolution and liquidation under the IBC, has actually steadily increased. According to data, as fresh insolvency cases were permitted to be admitted after the 1 year suspension throughout Covid-19, admissions under the IBC increased 65 percent during 2021-22.

The number of cases referred under Lok Adalats and the SARFAESI Act increased by 336 per cent and 335 per cent, respectively, the IBC system led in terms of quantity involved.