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The Insolvency and Bankruptcy Code (IBC) seems to be incentivising debtors to settle their defaults even before the cases are admitted under the code with over 27,500 applications for initiation of CIRPs with an underlying default of Rs 9.74 lakh crore withdrawn before their admission.
Another measure of the effectiveness of the code is the ratio of resolution to liquidation. With several initiatives to improve outcomes, the ratio has improved from 0.21 in FY18 to 0.64 in Q3FY24, according to CareEdge Ratings.
The average time taken for resolution or liquidation continues to increase for operational creditors (OCs) and financial creditors (FCs) during the December quarter. Meanwhile, the overall recovery rate till Q3FY24 was 31.86% implying a haircut of approximately 68%. The cumulative recovery rate has been on a downtrend,
decreasing from 43% in Q1FY20 and 32.9% in Q4FY22 as larger resolutions have already been executed and a significant number of liquidated cases were either BIFR cases and/or defunct with high-resolution time.
Number of cases
After slowing in the pandemic period of FY21 and FY22, the number of insolvency cases referred has increased by around 19% y-o-y in Q2FY24. However, despite the increase, the number of cases admitted to the insolvency process continued to be lower compared to earlier quarters in FY20. The distribution of cases across sectors
remains broadly similar, compared to earlier periods given the extended resolution timelines.
Meanwhile, the number of ongoing CIRPs has declined on a y-o-y as well as sequential basis indicating that cases have been disposed at a faster pace compared to their admission. Furthermore, manufacturing too accounts for the largest number of cases, albeit its share has steadily reduced.
Of the close to 1,900 ongoing CIRPs, there has been a delay of more than 270 days for the completion of the process of 68% of ongoing CIRPs in December 2023 as compared to 73% in December 2021 and 64% in December 2022. The share has broadly moved to the higher number of days tier.
Recovery rate
Post the implementation of the IBC, the overall recovery rate till Q4FY22 in India reached 32.9%. The recovery rate for Q2FY24 stood at 33.01%, while the overall recovery rate reached 31.86% till Q3FY24. However, the recovery for Q3FY24 has reduced from 33.01 in Q2FY24. Meanwhile, for the cases which have been resolved, the
creditors have continued to face a haircut of approximately 68% on admitted claims. Some of the cases being disposed of are several years old. Thus, there is a huge amount of interest and overdue charges admitted to such cases, inflating the overall figures.
The CIRP initiation scaled up rapidly till FY20 and dropped off in FY21 due to the pandemic. In FY22 and FY23, CIRP initiation commenced rising again. In FY23, the number of cases crossed the FY19 threshold, and the growth has continued in Q3FY24. The share of CIRPs initiated by corporate debtors has reduced significantly over time and further, the number of cases initiated by operational creditors has reduced in Q3FY24.
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