Even as the average time taken for insolvency resolution has been on an increasing trend and stood at around 23 months, new case admissions are declining. According to a report by Kotak Institutional Equities, the number of new cases admitted through IBC stood at 246 in Q1FY25, which is broadly in line with the run-rate in FY2024 (987 cases), but well below the peak run-rate of 1,990 cases admitted in FY2020. The total number of ongoing cases, it added, has been broadly flat over the past year, in the range of 1,900- 2,000 cases.
Kotak Institutional Equities said that corporate India continues to be in a healthy shape, with no fresh signs of stress as most corporates have deleveraged significantly. As a result, the number of cases and outstanding claims will likely stay low as legacy stress gets resolved. On the other hand, it added, “we have not seen a large capex cycle or asset price inflation either, which could pose a threat to the asset quality of banks in the near term”.
IBC has gained prominence in the past few years and in terms of case admissions, while operational creditors have led new case admissions in the past, financial creditors have been noticed to be admitting a higher share of cases to IBC. Out of the total admitted cases until Q1FY25, around 40 per cent were from the manufacturing space, 18 per cent from real estate, approximately 7 per cent from construction and about 13 per cent from retail/wholesale trade, Kotak stated.
Of all closed cases until date, Kotak added, liquidation continued to remain the most common path of closure for cases under the insolvency resolution process, with around 44 per cent concluded through liquidation. As of June 2024, around 68 per cent of ongoing cases have passed 270 days since admission, with another around 10 per cent crossing 180 days. Hence, the number of cases facing liquidation is likely to stay high.
The report added that only 17 per cent cases were resolved, with an average haircut of around 68 per cent on admitted claims. “The total amount of debt resolved through the IBC stands at ~Rs 10.6 trillion. Debt of ~Rs125 billion was resolved in Q1FY25, resulting in realizations of ~Rs 40 billion (~30 per cent),” Kotak stated while maintaining that financial creditors have taken a haircut of around 68 per cent on admitted claims on cases, which have ended in a resolution plan, thus far. However, it said, the amount yielded on resolution, as a percentage of the liquidation value, is high (approximately 160 per cent). The overall haircut scenario has improved, but it is not very exciting. “Nevertheless, the number of bad assets sitting in the banking system remains quite high, which means that there is still a long runway for resolutions. As we work through some weaker assets, where there are incomplete projects or sectors with very poor demand from buyers, realization values are relatively poorer. The average time taken for CIRPs, which ended with a resolution plan, has also inched up steadily to ~685 days,” Kotak concluded.