IBC dominant mode of recovery in 2019-20

The Insolvency and Bankruptcy Code (IBC) remained the dominant mode of recovery in 2019-20, according to the report on trend and progress of banking released by Reserve Bank of India (RBI).

While the recovery rate in IBC remained at 45.5%, lenders were able to recover 26.7% of the amount involved through securitisation and reconstruction of financial assets and enforcement of security interest (SARFAESI) Act, 2002.

Overall, the lenders were able to recover 23.2% of the amount involved through various recovery channels in 2019-20. This is better than 16.3% recovery through various recovery mechanisms seen in 2018-19.

The report also points out that recovery through SARFAESI Act may gain momentum. “With the applicability of the SARFAESI Act extended to co-operative banks, recovery through this channel is expected to gain further traction,“ the report said.

The report highlighted that asset sales by banks to assets reconstruction companies (ARCs) declined in 2019-20. This could be due to banks opting for other resolution channels such as IBC and SARFAESI, the report added.

A record 78 resolution plans were approved by bankruptcy courts in the first 9 months of 2020, according to Insolvency and Bankruptcy Board of India (IBBI) data. “Going forward, insolvency outcomes will hinge around uncertainties relating to Covid-19,” the report said.

The government has suspended any fresh initiation of insolvency proceedings in respect of defaults arising during one year commencing March 25, 2020.

Sonam Chandwani, managing partner at KS Legal & Associates, said that National Company Law Tribunal (NCLT) was the last resort for financial institutions, but in the light of ongoing changes, more cases will be resolved outside court through inter-creditor agreement (ICA). “We may also witness a spike in cases getting resolved through one-time settlement (OTS) and expect banks to use the restructuring route a lot more over the next year or so,” she added.