India's Bankruptcy Landscape Transforms as Financial Creditors Take Charge
India's Insolvency and Bankruptcy Code (IBC) is witnessing a fundamental transformation in its character, with financial creditors such as banks and financial institutions now leading the charge in initiating insolvency proceedings. This marks a significant departure from earlier trends where operational creditors dominated bankruptcy filings.
According to official data from the Insolvency and Bankruptcy Board of India (IBBI), financial creditors have surpassed operational creditors in triggering insolvency cases since FY22, indicating the maturing of IBC as a corporate rescue instrument primarily driven by financial stakeholders.
The Changing Pattern of Creditor Behavior
For five consecutive years up to FY22, operational creditors including vendors and suppliers were more active in dragging defaulting companies to the National Company Law Tribunal (NCLT). However, this trend has reversed dramatically in recent years.
In FY21, operational creditors accounted for 59% of the 536 insolvency cases admitted by NCLT. This share dropped significantly to approximately 43% in FY23, 40% in FY24, and about 31% in FY25. The current financial year shows a continuation of this pattern, with operational creditors initiating only 38% of admitted cases in the first two quarters, dropping to just one-third of all cases in the September quarter.
Corporate-initiated insolvency proceedings remain minimal, constituting only 6% of the 8,654 cases admitted under IBC since its implementation. The Reserve Bank of India has referred five specific cases to NCLT for debt resolution.
Recovery Outcomes and Settlement Patterns
The data reveals interesting patterns in recovery outcomes for different types of creditors. Operational creditors have been particularly active in case closures and withdrawals, accounting for two-thirds of the 1,342 bankruptcy cases closed so far, including settlements. They also represent two-thirds of the 1,223 cases withdrawn from tribunals.
When examining recovery rates in cases that culminated in approved resolution plans, operational creditors received approximately one-fourth of their claims, while financial creditors recovered about one-third of their outstanding amounts. This differential recovery pattern highlights the varying success rates between creditor categories.
Key Factors Driving the Shift
Experts point to several factors behind this significant shift in creditor behavior. The most crucial change was the government's March 2020 decision to raise the payment default threshold for triggering IBC action from ₹1 lakh to ₹1 crore. This measure effectively discouraged creditors from invoking IBC for smaller payment delays.
Mukesh Chand, senior counsel at Economic Laws Practice, explains the evolving dynamics: "The changing trend in filings is quite natural and reflects the learning curve of both banks and the business community."
Chand notes that when IBC was implemented in 2016, banks were still comfortable with existing frameworks under the Debt Recovery Tribunal and SARFAESI Act. "In contrast, operational creditors were quick to seize the opportunity. They had already been using winding-up petitions as a pressure tool under the earlier regime of the Companies Act and they adapted that strategy to insolvency filings too."
The threat of admission under IBC became an extremely effective pressure mechanism, prompting many debtors to settle well before admission. This is clearly reflected in IBBI data showing a large share of operational creditor-initiated cases being withdrawn or settled prior to admission.
Financial institutions gradually recognized the benefits of the IBC framework, particularly its time-bound resolution process, avoidance actions, and the priority accorded to them in the distribution hierarchy. Once financial creditors understood the effectiveness of these mechanisms, they increasingly shifted their stressed accounts above ₹1 crore into IBC, overtaking operational creditors in initiating cases from FY22 onwards.
The evolving patterns in India's bankruptcy ecosystem demonstrate the IBC's maturation as a sophisticated corporate rescue tool, with financial creditors now taking the lead role in driving insolvency proceedings while operational creditors adopt a more measured approach to debt recovery.
