The Insolvency and Bankruptcy Code (IBC) has seen a significant decline in recovery rates during the financial year 2026, with recoveries halving compared to previous years, according to a recent report by ICRA. The report highlights that the average recovery rate for creditors has dropped sharply, falling to around 25% from over 50% in earlier periods. This decline is attributed to prolonged resolution timelines and higher haircuts, where creditors are forced to accept steep discounts on their claims.
Key Findings from the ICRA Report
The ICRA analysis reveals that the total amount realized by creditors through IBC proceedings in FY26 was approximately INR 30,000 crore, a drastic reduction from INR 60,000 crore in FY25. The number of resolved cases also decreased, with only 120 cases concluded compared to 180 in the previous year. The report notes that the average time taken for resolution has increased to over 500 days, far exceeding the mandated 330-day timeline. This delay is partly due to legal challenges and complexities in asset valuation.
Impact of High Haircuts
High haircuts have become a major concern, with creditors recovering only a fraction of their dues. In many cases, haircuts have exceeded 70%, particularly in sectors like real estate and infrastructure. The report emphasizes that this trend undermines the IBC's objective of maximizing asset value and promoting timely resolution. ICRA warns that if delays and haircuts persist, the IBC's credibility as a robust insolvency framework could be at risk.
Sectoral Analysis
The real estate sector witnessed the highest haircuts, with recovery rates as low as 15%. The infrastructure sector also faced significant challenges, with delays in project approvals and environmental clearances hampering resolution. In contrast, the manufacturing sector saw relatively better recoveries, averaging around 40%. The report suggests that sector-specific factors play a crucial role in determining recovery outcomes.
Reasons Behind the Decline
- Legal Entanglements: Numerous cases are stuck in litigation, causing delays and reducing creditor confidence.
- Valuation Disputes: Disagreements over asset valuation between creditors and resolution professionals lead to prolonged proceedings.
- Economic Slowdown: The broader economic environment has impacted asset prices, resulting in lower realization values.
- Lack of Bidders: Limited interest from potential buyers, especially in distressed sectors, has forced creditors to accept lower offers.
Way Forward
ICRA recommends streamlining the IBC process by establishing a dedicated fast-track mechanism for smaller cases and enhancing the role of the National Company Law Tribunal (NCLT) to expedite approvals. The report also calls for better pre-packaged insolvency options to reduce timelines. Additionally, a more transparent asset valuation framework could help minimize disputes and improve recovery rates.
The findings underscore the need for policy interventions to restore the IBC's effectiveness. Without timely reforms, the code may fail to achieve its primary goals of debt resolution and creditor protection.
