Value Preservation Remains a Challenge
While India's financial services sector shows strength with gross non-performing assets (NPAs) falling to 2.15% by September 2025 and the Nifty Financial Services Index gaining 15.5% in the first half of 2025, the Insolvency and Bankruptcy Code (IBC) continues to struggle with preserving company value. The IBC often favors debt recovery over helping businesses truly revive, especially those with few physical assets. Despite the sector's overall recovery, creditors still face substantial losses, with average haircuts around 68% on admitted claims, showing that value is often lost during the resolution process.
Asset-Light Firms Face Bigger Hurdles
The IBC works better for businesses with clear physical assets that can be sold. However, companies with fewer tangible assets, like service or technology firms, are at a disadvantage. Their value often lies in intangible assets such as intellectual property or brand reputation, which can quickly lose worth during long bankruptcy processes. These companies often end up liquidated, providing little return to creditors beyond what's owed first. This means that even if the financial sector's overall balance sheets look better due to fewer NPAs, the system isn't effectively maximizing value for many types of businesses. Delays also worsen the problem, with nearly 15,000 corporate insolvency cases pending at the NCLT as of March 2025, further reducing the value of assets.
New Amendments Face Skepticism
The 2025 amendments to the IBC include measures like the Creditor-Initiated Insolvency Resolution Process (CIIRP), designed to speed up resolutions by letting creditors start proceedings outside of court. However, this new approach is met with doubt. Critics worry that business owners, facing potential loss of control, might not cooperate effectively with revival plans. The reforms are also seen as minor tweaks rather than fundamental changes, failing to tackle key issues like industry differences, NCLT resource limits, or the difficulty of valuing intangible assets. Small and medium-sized businesses (MSMEs) still find the IBC costly and often leading to liquidation, with little help from these reforms.
Concerns Over Liquidation Bias
Looking critically, the IBC seems to favor liquidation over preserving value, particularly for companies with less traditional business models. Even with better overall recovery rates around 31-36%, the goal of maximizing value is not being met. The CIIRP, while new, could just add more steps if the conflicting interests of business owners and creditors aren't addressed. Banks and financial institutions, even with low NPAs and good market performance (like a Nifty Financial Services P/E of 14.8x), could face slow, low returns from struggling asset-light firms or MSMEs. The large number of pending NCLT cases, with about 76% of ongoing processes taking over 270 days by December 2025, shows how long resolutions take, leading to value destruction and possibly hiding future financial risks.
Outlook: Revival Hinges on Implementation
The success of the 2025 IBC amendments, especially the CIIRP, will depend on how well they are put into practice and if they can truly encourage cooperation and speed up resolutions for all struggling businesses. While the financial sector is currently strong due to low NPAs and good economic conditions, its long-term health relies on the IBC shifting from just recovering debt to helping businesses genuinely recover, particularly in India's growing economy of asset-light companies.