Lenders willing to offer lower rates to distressed firms since IBC took effect, says insolvency board

New Delhi: Creditors have become more willing to lend to distressed firms at lower interest rates since the Insolvency and Bankruptcy Code (IBC) was adopted, showing they are more confident of recovering dues in case of a default, the Insolvency and Bankruptcy Board of India (IBBI) said in its FY25 update on outcomes of debt resolution. The IBC came into force on 1 December 2016.

In the update, released on Tuesday, IBBI chairman Ravi Mital cited a study conducted by IIM Bangalore that showed there has been a 3.3% reduction in the cost of debt for distressed firms since the IBC was adopted. Mital termed this an “improved credit environment for distressed firms".

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“A possible explanation could be that distressed firms significantly improved their ‘credit channels’ while experiencing lower cost of credit in the post-IBC world with respect to their non-distressed counterparts,” said the IIM study, which used data from National E-governance Services Ltd, an information utility set up by leading banks and public institutions. The study did not provide absolute values for total debt or the cost of funds. 

IBBI said, citing the study, that the bankruptcy code has prompted borrowers to adhere to loan payment schedules.

Citing another study, it said in the case of companies that had their distress resolved under the IBC, there was a 50% increase in the average employee cost in the three years after the resolution, indicating its contribution to preserving and adding jobs.

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The introduction of the IBC has brought a sense of responsibility among promoters of businesses, said Ritesh Kumar Adatiya, director at NPV Insolvency Professionals Pvt. Ltd. 

“This also brings comfort to the lender that in case promoters do not behave, they have a very effective tool as deterrence. This additional comfort helps in reducing the risk premium and hence the cost of debt has been reduced a bit," he added.

Fewer overdue loans

Separately, the IIM study showed that between 2018-20 and 2020-24 there was a significant reduction in the value of overdue loans and the number of loan accounts deemed overdue.

There has also been faster resolution of delayed payments, the study said. The proportion of loan accounts transitioning from ‘overdue’ to ‘normal’ annually has increased, indicating an improvement in the credit culture of corporations, it said.

The average number of days a loan account remains in the ‘overdue’ category before transitioning to ‘normal’ has fallen from 248–344 days to 30-87 days. This shows both debtors and creditors are trying to resolve delinquencies at the earliest, IBBI said, citing the study. NeSL data enabled the classification of loans into different categories based on lenders' filings. 

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The study said it offered evidence that the IBC has brought about “significant behavioural changes in the credit ecosystem”, comprising corporations and banks. Credit monitoring has improved, the number of overdue accounts has fallen, and there is a systematic reduction in companies’ use of debt, especially long-term debt, it added.

“We also find that there is an increasing tendency to settle debts to avoid corporate insolvency resolution proceedings, which we interpret as a positive sign,” it said. Banks have also been shown to efficiently use the new legal apparatus for debt recovery, either by resolution or by liquidation, the study added.