Financial creditors’ IBC recovery hit; may fetch much less this year; two reasons to blame

The coronavirus pandemic and the suspension of new proceedings under the Insolvency and Bankruptcy Code (IBC) has resulted in a sharp fall in the resolution process, and thus the realisation for financial creditors has taken a severe hit. Financial creditors may realise only Rs 60,000-65,000 crore through the IBC in FY2021, which is a significant fall compared to Rs 1 lakh crore in the previous fiscal year, according to a report by the rating agency ICRA. For the first six months of FY2021, only 42 companies undergoing a corporate insolvency resolution process (CIRP) have seen a resolution plan being approved, yielding Rs 12,600 crore as recovery for financial creditors.

“The pandemic has thrown up new operational challenges for the various parties involved in a resolution process,” Abhishek Dafria, Vice President and Group Head – Structured Finance, ICRA. The resolution of CIRPs would continue to get impacted during the remaining period of FY2021 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, Abhishek Dafria added.

While the realisation from resolution plans is expected to remain at a subdued level this fiscal, the same is unlikely to recover in the next fiscal year as well. The realisation from resolution plans could continue to suffer in FY2022 as well as fresh insolvency proceedings have been suspended till 25 December 2020, for accounts that default after 25 March 2020, and could be further extended by three more months.

During the first half of the current fiscal, the number of cases admitted fell by 82 per cent, compared to the first half of FY2020. Also, the backlog of cases did not reduce due to the hampering of normal business operations during the pandemic. The number of CIRPs closed during April-September 2020 also fell on-year by 61 per cent.

Meanwhile, the government had said that it was difficult to find an adequate number of resolution applicants to rescue a corporate person who may default in the discharge of their obligation. Therefore, while suspending the IBC in June, the government had added that Section 7, 9, and 10 of the IBC will be suspended to prevent the initiation of insolvency proceedings for COVID-related defaults.