Bad loans recovery for financial creditors through IBC declines sharply due to pandemic, says Icra

The coronavirus crisis and the suspension of new proceedings under the Insolvency and Bankruptcy Code (IBC) has resulted in a sharp slowdown in insolvency resolution process, and accordingly, the realisation for financial creditors has declined, ratings agency Icra said on Tuesday.

The domestic ratings agency said for the first six months of the current financial year, only 42 companies undergoing a corporate insolvency resolution process (CIRP) saw a resolution plan being approved, yielding Rs 12,600 crore as recovery for financial creditors.

Icra, in a release, said it expects that the financial creditors could realise about Rs 60,000-65,000 crore in FY21 through successful resolution plans from the IBC as compared to about Rs 1 lakh crore realised in FY20.

Abhishek Dafria, vice president and group head – Structured Finance, Icra, said, “The pandemic has thrown up new operational challenges for the various parties involved in a resolution process. The resolution of CIRPs would continue to get impacted during the remaining period of FY21 due to a decline in the number of CIRPs yielding a resolution plan as well as an increase in haircuts that lenders would have to take.”

According to Dafria, even the expected realisation of Rs 60,000 -65,000 crore in this fiscal would largely depend on expected successful resolution of a large housing finance company currently under IBC process.

The rating agency further added that realisation from resolution plans could continue to suffer in FY22 as fresh insolvency proceedings have been suspended till December 25, 2020, for accounts which default after March 25 and could be further extended by three more months.

During first half of this fiscal, number of cases admitted (which were in default before the suspension was announced) declined by 82% (161 v/s 889) compared to first half of th last fiscal. Also, the backlog of cases has not reduced due to hampering of normal business operation during the pandemic. The number of CIRPs closed during H1FY21 declined by 61% compared to H1FY20.

“Further, new insolvency proceedings initiated in FY22, once the suspension on fresh insolvency proceedings are lifted, are unlikely to get resolved in the same fiscal, given the typical average time-period seen for CIRPs to conclude with a resolution plan is quite high (currently at 433 days). Thus Icra expects both, FY21 and FY22, to see relatively lower realisations from CIRPs for lenders compared to the preceding years,” said Sankha Subhra Banerjee, assistant vice president, Icra.