IBC prompted borrowers to adhere to stipulated payment schedules: IIM-B study
The enactment of Insolvency and Bankruptcy Code (IBC) in 2016 has injected discipline in the credit allocation process and has prompted borrowers to adhere to stipulated payment schedules, said a study by Indian Institute of Management, Bangalore submitted to India's banking regulator Insolvency and Bankruptcy Board of India (IBBI).
The study titled Behavioral Impact of IBC uses the National E-Governance Services Limited (NeSL) dataset spanning 2018–2024 on corporate loan accounts which captures periodic filings by creditors on key metrics of loans issued to corporate debtors. NeSL is India's first information utility, set up under the aegis of the IBC.
It also incorporate data on corporate insolvency resolution proceedings (CIRPs) from the IBBI dataset for the period 2017–2023, firm-level financial data from CMIE Prowess for the period 2010–2024 and data on non performing assets (NPAs) for banks from Reserve Bank of India for the period 2010–2024.
During the period under review, the study notes a significant reduction in loan accounts deemed 'Overdue', both in terms of the Rupee amount as well as in terms of the number of accounts, IBBI Chairman Ravi Mital said in January-March 2025 quarterly newsletter.
Similarly, the yearly proportion of transitions of loan accounts from the 'Overdue' category to the 'Normal' category have increased, supporting the view of an improvement in the credit culture of corporates, he said.
Even the average number of days that a loan account stays in the 'Overdue' category before transitioning to 'Normal' category has reduced from 248–344 days to 30-87 days. This shows that both debtors and creditors are trying to resolve the delinquencies at the earliest, Mr. Mital added.
Shifting control from debtors to creditors, the IBC introduced a time-bound resolution mechanism to streamline bankruptcy proceedings, reduce judicial delays, and improve creditor recoveries, the study said.
Thanks to RBI's stringent review of Asset Quality and imposing strict conditions on banks with huge NPAs, the gross NPAs of the scheduled commercial banks have declined from the peak of 11.2% in March 2018 to 2.8% in March 2024. A good part of that reduction is attributable to resolution processes enabled under IBC. The resolution mechanism of IBC found to be effective in addressing the bad loan recovery of bank NPAs, it added.
As regards cost of debt, study indicates a 3% reduction in cost of debt for distressed firms post-IBC (vs. non-distressed firms), indicating an improved credit environment for distressed firms, Mr. Mital said in the newsletter.
The IBC has had a positive impact on corporate governance. One such finding, as per the study, has been an improved proportion of independent directors on the boards of the companies resolved under IBC, he added.
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