The performance of the Insolvency and Bankruptcy Code (IBC) — a landmark reform executed during the first term of the Narendra Modi government — has been under intense scrutiny. The Code has been mainly criticised on three counts: First, there are inordinate delays in the resolution procedure, second, there have been more liquidations than resolutions and, third, the recovery amounts under IBC are not substantial, making it more of a talking point than an effective structural reform.
In this article, we focus on the first of the aforementioned criticisms to evaluate the performance of the IBC vis-a-vis the Board of Industrial and Financial Reconstruction (BIFR) regime. We contend that assessing IBC based only on the average time taken to resolve successful cases does a substantial disservice to how much more efficient the IBC is compared to the previous regimes. A common metric used to assess the efficacy of IBC is the time taken to resolve cases. It is calculated by taking a simple average of time taken on each completed case. This is one of the metrics used by the Insolvency and Bankruptcy Board of India (IBBI) to compare the IBC regime with the earlier BIFR regime. For instance, it is often reported that the IBC has reduced the average time to settle a bankruptcy case from 5.8 years to 1.6 years. However, the performance of a bankruptcy resolution should ideally be evaluated along at least three dimensions: The average time taken to resolve a case, the fraction of cases resolved within a given timeframe, and the recovery rate conditional on resolution. Focusing on any single parameter may result in a gross under (over) estimation of the IBC’s (BIFR’s) performance.
We begin by examining the fraction of cases that are resolved within a specific timeframe. To this end, we employ a simple metric often used in statistics. We first compute the total cases resolved under the IBC (and correspondingly with BIFR). Then, for any time t (in, say, months), we compute the fraction of cases that were resolved in less than t months. The figure plots the same for the IBC and BIFR.
That the curve for the IBC (in blue) is significantly above the one for BIFR (orange) across the time series indicating that, for any fraction of the total cases resolved under each scheme, the IBC took significantly less time than BIFR. As one can see, even amongst those cases that were eventually resolved under the BIFR, over 80 per cent of them took more than 34 months. In fact, the figure looks qualitatively similar even if we restrict attention to the BIFR cases that were solved within 34 months, as is the case for IBC.
There are two grounds on which one could question the above conclusion. First, it may be the case that while the BIFR was somewhat slow in resolution, it solved significantly more cases. This is, however, simply not true. Since its inception in 1987, the BIFR has resolved less than 3,500 cases while the IBC, since it was launched in 2016, resolved about 1,178 cases until it was suspended at the pandemic onset of the COVID. A second criticism could be that this metric tilts the picture in favor of IBC because it ignores the number of pending cases. For example, let us say, given 10 cases to be resolved, IBC resolves one case in one month and nothing more, while BIFR resolved 10 cases with each case taking two months. Even in such a case, the graph will look similar. To correct the above bias of only looking at the settled cases and ignoring pending cases, we propose to use an alternate metric that combines the time horizon of resolution and the number of pending cases.
This method is akin to survival analysis. Specifically, we calculate the ratio of cases settled within a year to cases that spent one year in the bankruptcy system but remained unresolved (this is known as odds ratio). Applying the above metric, we find that within the first year, the IBC was almost 60 times more efficient than the BIFR. The ratio is 0.0047 for the BIFR, whereas it is 0.28 for the IBC. While we focus on a time interval of one year, the method is also amenable to estimation at higher frequency.
We start with a broad definition of case resolutions that includes both liquidation and as well as sales on a going-concern basis. Recognising the difference between the two, we narrow the definition of closure by excluding liquidations from the numerator, while still including it in the denominator. The outperformance of the IBC within a year increases significantly. We find that the IBC continues to outperform the earlier BIFR regime by 66 times which is substantially higher than a comparison based on simple time averages.
We then look at year two. Here the denominator consists of cases that remained unsettled for at least two years, and the numerator is formed by cases that get settled between year one and year two. The ratios for the IBC and BIFR turn out to be 0.3 and 0.0344 respectively — a large outperformance of almost 10 times. When we narrow the definition of resolution and exclude liquidation cases, the outperformance grows to 28 times during the second year. The IBC continues to outperform the BIFR even in the third year, but we stop the analysis here because the time frame coincides with the onset of the pandemic for many firms in the IBC. Although the IBC process continued for existing cases, drawing any inference based on performance during an extraordinary time such as the Covid induced crisis is not reasonable.
Finally, since many of the unresolved cases stuck in the BIFR were transferred to IBC, delays in resolution should be viewed in comparison with the historical case pendency. On adjusting the denominator for the legacy BIFR cases — that is, the unresolved cases shifted into the IBC from the BIFR — we find that the IBC is at least 23 times more efficient than the BIFR regime that preceded it based on the odds ratios in a year one.
One could argue that because the IBC is more efficient, it is also likely to have seen more cases being admitted than under the BIFR. This is a fair point, but one that only bolsters our thesis that the IBC represents a structural shift and a substantive improvement over the BIFR.
The bottom line is straightforward: The IBC has significantly outperformed the earlier BIFR regime in terms of the speed of resolution. Most analyzes of IBC’s performance overlook the important fact that many of the legacy BIFR cases were subsumed by IBC, and these were often zombie firms that were kept alive due to massive evergreening of loans between 2008-2015 — a “mysterious” sequence of events that wrecked India’s banking system that took the better part of a decade to fix. Further, the most powerful impact of the IBC is likely to be its ex-ante impact on firm and promoter behaviour. In other words, the IBC is potentially as effective as a disciplining device as much as it is a resolution mechanism.
Alok and Tantri are with Indian School of Business, Hyderabad; Kuvalekar is with the University of Essex; Mantri is with the India Enterprise Council. They thank Aditya Murlidharan from Center For Analytical Finance, Indian School of Business for research support