India's Insolvency System in Meltdown! Record Delays & Paltry Recoveries Spark Urgent Reform Debate

The Indian insolvency framework is showing signs of strain, with significant delays and declining recovery rates observed in the second quarter of fiscal year 2025-26. This performance dip, detailed in recent reports, has prompted calls for comprehensive reforms to streamline the process.

Q2 FY26 Performance Metrics

• The resolution to liquidation ratio fell to 0.7x in Q2 FY26, down from 0.9x in the previous quarter and the full fiscal year 2025.
• Lender realisations across the board averaged about 25% of claims, hitting a low for operational creditors.
• Financial creditor recoveries saw a slight rise to 33% year-on-year but remained stagnant within the 31-34% band seen since FY23.
• Corporate insolvency resolution process (CIRP) cases breaching statutory timelines (270 days) climbed to 77% in Q2 FY26, up from 71% in Q1 FY26.

Deepening Delays and Deteriorating Liquidation

• Average resolution timelines extended significantly in Q2 FY26: 729 days for financial creditors, 739 days for operational creditors, and 627 days for corporate debtors.
• Liquidation timelines also worsened, reaching 526 days for financial creditors and 527 days for operational creditors.
• Liquidation itself became the dominant mode of closure for corporate insolvency cases, accounting for 43% of outcomes.

Systemic Bottlenecks Identified

• A report by India Ratings highlighted persistent systemic bottlenecks, including capacity constraints at adjudicating authorities like the National Company Law Tribunal (NCLT).
• Long admission delays for cases, frequent litigation, and uneven execution across different NCLT benches continue to erode the value of stressed assets.
• The quality of enforcement, rather than regulation alone, remains a critical factor in recovery outcomes.

Proposed Reforms for Revival

• The Parliamentary Standing Committee on Finance has outlined several key changes to the Insolvency and Bankruptcy Code (IBC).
• Recommendations include increasing NCLT benches, filling existing vacancies, and improving the overall efficiency of the tribunal and its appellate body.
• The panel suggested temporary fast-track courts to clear the backlog and reduce resolution timelines.
• Crucially, eligibility rules for homebuyers are proposed to be revised, allowing them to submit resolution plans and receive concessions similar to financial creditors.
• The corporate affairs ministry is urged to collaborate with housing and real estate regulatory bodies to better support homebuyers and resolve regulatory overlaps.

Investor Sentiment and Market Outlook

• The slowdown in the insolvency system and poor recovery rates can negatively impact investor sentiment, particularly for financial institutions and holders of stressed assets.
• Efficient resolution mechanisms are vital for a healthy credit market and attracting investment into distressed asset classes.
• The proposed reforms, if implemented effectively, could signal a renewed commitment to improving the ease of doing business and protecting creditor rights.

Impact

• This news can impact the Indian stock market by affecting the financial health of banks and non-banking financial companies (NBFCs) that hold significant loan portfolios. Poor recovery rates can lead to higher non-performing assets (NPAs) and reduced profitability for lenders.
• It also influences investor confidence in the distressed asset market and the overall efficiency of India's corporate resolution framework.
• For corporate debtors, extended timelines increase uncertainty and can further erode business value.
• Impact Rating: 7

Difficult Terms Explained

• Insolvency: A state where a person or company is unable to pay their debts.
• Liquidation: The process of winding up a company, selling its assets, and distributing the proceeds to creditors.
• Resolution: The process of finding a solution to a company's financial distress, often by restructuring its debt or operations, to allow it to continue as a going concern.
• Lender Realisations: The actual amount of money recovered by lenders (creditors) from the sale of assets or through a resolution plan.
• Statutory Timelines: Fixed deadlines set by law within which specific legal processes must be completed.
• Corporate Insolvency: Insolvency proceedings specifically for companies.
• Financial Creditors: Entities that have a financial relationship with the debtor, typically by lending money (e.g., banks, bondholders).
• Operational Creditors: Entities to whom the debtor owes money for goods or services supplied in the ordinary course of business (e.g., suppliers, employees).
• CIRP (Corporate Insolvency Resolution Process): The formal procedure under the Insolvency and Bankruptcy Code, 2016, to resolve a corporate debtor's insolvency.
• National Company Law Tribunal (NCLT): The quasi-judicial body established to handle corporate insolvency and bankruptcy cases in India.