India's insolvency code is a vital growth enabler: Let's enhance it

This reform would perform better if we adopt technology for processes, clarify legal principles and close cross-border gaps

- AMITABH KANT & RICHA ROY

The Insolvency and Bankruptcy Code (IBC) transformed India's approach to corporate financial distress. Once, it was said that India transitioned from "socialism without an entry" to "capitalism without an exit" for businesses.

This paradigm shifted with the introduction of the IBC, which provided a much-needed mechanism to address insolvency issues in a time-bound and efficient manner. Passed in May 2016, it has played a transformative role in the Indian economy. At the time of its enactment, we were grappling with a twin balance sheet crisis, where banks' non-performing assets (NPAs) were hovering close to 12%.

This resulted in the choking of fresh credit, the jet fuel for any economy, stalling economic growth. The IBC emerged as the lighthouse of a new era, resulting in what J. Nariman eloquently paraphrased John Milton to call a "defaulter's Paradise Lost."

It engendered a culture of corporate accountability and credit discipline. Loan contracts regained their sanctity. A behavioral shift occurred for borrowers, who repaid their debt. NPAs are now at a historic low, bank balance sheets are robust, credit is growing at a healthy clip and growth is back on track.

The IBC succeeded because the entire ecosystem and institutional infrastructure, from regulators, including the new Insolvency and Bankruptcy Board of India (IBBI), and the legislature to the courts, banks and the market worked for it.

However, we must acknowledge some concerns over the present functioning of the IBC that indicate a need for a second generation of reforms.

Analysis of IBBI data shows that insolvency resolution at the National Company Law Tribunal (NCLT) averaged 716 days in 2023-24, up from 654 days in 2022-23.

More concerning is the average time taken for the admission of cases, which stood at 468 days in 2020-21 and rose to 650 days in 2021-22.