According to a report released on Friday by domestic rating agency Indian Credit Rating Company (Icra), there has been an increase in the percentage of haircuts taken by creditors in bankruptcy resolutions, rising to 73 per cent in FY24 from 64 per cent in FY23. The report noted that a total of 269 resolution plans were sanctioned by the National Company Law Tribunals (NCLTs) in FY24, up from 189 in the previous fiscal year.
In contrast, new admissions decreased to 987 in FY24 from 1,263 in FY23, which the agency attributed to a higher base in the previous fiscal due to the Covid-19 pandemic-related stress. The haircuts, representing the sacrifices made by lenders in comparison to the total dues during corporate insolvency resolutions, have raised concerns about the perceived value of assets acquired by new bidders.
Abhishek Dafria, the group head for structured finance ratings at Icra, expressed concern over the "worsening" trend of haircuts, noting the steep increase to 73 per cent in FY24 from the already high 64 per cent in FY23. He attributed this rise, in part, to the prolonged average resolution time, which increased to 843 days in FY24 from 831 days, largely due to litigation. This surpasses the 330 days resolution timeline envisioned by the bankruptcy law.
Icra predicts that average recoveries for lenders will likely remain in the range of 30-35 per cent in FY25. Dafria welcomed the increase in the number of corporate insolvency resolution processes (CIRPs) to 269 in FY24, emphasising their role in sustaining entities as going concerns. The decrease in fresh additions has contributed to a reduction in ongoing CIRPs at NCLTs to 1,920 as of 31 March 2024, compared to 1,953 a year earlier.
Additionally, NCLT issued liquidation orders for 446 corporate debtors in FY24, up from 400 in FY23. However, the report highlighted that a significant portion of CIRPs, 45 per cent of the 5,467 closed cases since the inception of the Insolvency and Bankruptcy Code (IBC), resulted in liquidation. Only 17 per cent of cases yielded resolution plans, while the remaining were withdrawn post NCLT admission.
Furthermore, the report noted that 960 corporate debtors had completed liquidation by March 2024, with creditors realising only 4 per cent of their total admitted claims. Dafria emphasised that over 75 per cent of CIRPs entering liquidation were defunct entities or were already under the purview of the Board of Industrial and Financial Reconstruction (BIFR) at the time of admission under the IBC.
