Uday Kotak blames delay in admission to NCLT as financial creditors face 68% haircut on admitted claims through IBC

The financial creditors have faced a haircut of around 68% on admitted claims in the Insolvency and Bankruptcy Code (IBC). The total amount of debt resolved through the IBC stands at ₹10.5 lakh crore, while resolutions have been broadly steady with the January-March 2024 quarter seeing a resolution of ₹480 billion of debt, resulting in realization of ₹120 billion, which amounts to 25%.

According to a report by Kotak Institutional Equities, the overall haircut scenario has improved but is not very encouraging. As we work through some of the weaker assets where there are incomplete projects or sectors with very poor demand from buyers, the realization values are relatively poorer.

Further, the average time taken for CIRPs, which ended with a resolution plan, has also been steadily inching up and stood at ~680 days as of March 2024.

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Veteran banker and Founder & Director of Kotak Mahindra Bank, Uday Kotak believes that the recovery in insolvency cases will improve if the admission process in NCLT is fastened.

“IBC resolution at 32% of claims. It means 68% lost with no interest post claim admission. Main reason is delay in admission to NCLT and time taken there. If we quicken that recovery % improves. IBC has brought benefits of creditor being in control and corporate accountability,” Kotak said in a post on X.

Meanwhile, the number of new cases admitted through IBC stood at 987 in FY24, lower than 1,263 cases admitted in FY23 and well below the peak of 1,990 cases admitted in FY20. The total number of ongoing cases declined marginally by ~2% YoY, standing at 1,920 as of March 2024.

“IBC has gained prominence in the past few years. While operational creditors have led new case admissions in the past, we see financial creditors admitting a higher share of cases to IBC recently. Out of the total admitted cases till Q4FY24, 38% were from the manufacturing space, 21% from real estate, ~12% from construction and ~10% from retail/wholesale trade,” Kotak Equities said.

The brokerage firm believes corporate India continues to be in a healthy shape with no new signs of stress as most companies have gone through a fair amount of deleveraging. As a result, the direction of cases and outstanding claims will likely stay low as legacy stress gets resolved.

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On the other hand, there has been no large capex cycle or asset price inflation either, which could pose a threat in the near term to asset quality of banks.

Meanwhile, liquidation remains the most common path of closure for cases under the insolvency resolution process. Of the ~5,640 cases that were closed till Q4FY24, only ~17% were resolved while ~45% faced liquidation.

As of Q4FY24, ~68% of ongoing cases have passed 270 days since admission, with another ~10% crossing 180 days. Hence, the number of cases facing liquidation is likely to stay high, said the report.

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