Changes in insolvency rules unlikely to uplift recovery rates for ARCs, lenders: Reports

The recent amendments to the Insolvency and Bankruptcy Code are unlikely to uplift the recovery rates for lenders, asset reconstruction companies, and security receipt SR investors, but may help improve recovery predictions, analysts said on Tuesday.

The recent amendments to the Insolvency and Bankruptcy Code are unlikely to uplift the recovery rates for lenders, asset reconstruction companies, and security receipt (SR) investors, but may help improve recovery predictions, analysts said on Tuesday. Mandating admission within 14 days for proven default cases can significantly reduce the overall resolution timeline by 1-1.5 years, analysts at several rating agencies said. ''For lenders, asset reconstruction companies (ARCs), and security receipt investors, the key benefit lies in better predictability of recoveries and cash flow timing, not an immediate uplift in recovery rates,'' India Ratings and Research said in a note. Parliament, on April 1, passed amendments to the insolvency law, which are aimed at faster resolution of stressed firms and reduce case backlog. Mohit Makhija, senior director at Crisil Ratings, said that currently, the Insolvency and Bankruptcy Code resolution process takes 3.5-4 years on average, inclusive of over a year spent just in admitting the case into the Corporate Insolvency Resolution Process (CIRP). In FY25, the average time taken for admission for the top 25 resolutions stood at around 500 days, Crisil ratings said in a report. India Ratings and Research said CIRP recoveries fell to 20 per cent in Q3FY26 from 25 per cent as of Q2FY26, with timelines stretched to nearly 745 days despite system-wide data showing an improvement, with IBC recovery rates rising to 36.6 per cent in FY25 from 28.3 per cent in FY24. Parliament passed the amendments to the insolvency law, and Finance Minister Nirmala Sitharaman emphasised that the intent is not to liquidate companies but to help them run with guardrails. The bill replaces the underutilised fast-track process with a new creditor-initiated insolvency framework, featuring out-of-court initiation, debtor-in-possession and creditor-in-control model, where management continues to vest in the existing Board of Directors or partners with safeguards, and defined timelines. Also, there is an enabling framework for group insolvency and cross-border insolvency to promote investor confidence and align domestic practices with best international practices. Among other changes, an application for initiating the insolvency resolution process has to be admitted within 14 days if the default by a company has been established, and appeals related to IBC before the National Company Law Appellate Tribunal (NCLAT) have to be decided upon within three months. Crisil, in its report, said that with NCLT's heavy backlog of 7,000 cases pending admission, the introduction of CIIRP (creditor-initiated insolvency resolution process) will bring much-needed relief by allowing out-of-court settlements. ''This framework allows borrowers to retain management control, minimising operational disruption - a provision similar to RBI's June 2019 framework. Moreover, even for out-of-court settlements under CIIRP, a resolution professional would be appointed for all operational and strategic decision-making while having also veto rights over specific resolutions.''