Debt Recovery Channels for Non-Performing Assets in India: Is IBC a New Hope?

Abstract

In accounting, stressed assets are financial assets that are experiencing difficulty in generating expected income or repayment. To deal with the stressed assets in banks, RBI has implemented many NPA recovery channels, comprising Lok Adalats, DRTs, the SARFAESI Act, and IBC 2016. Prior to the IBC, SARFAESI was favoured for its recovery rate and the power it granted banks to seize collateral. However, overall, these mechanisms were deemed ineffective and time-consuming compared to global practices. The introduction of IBC was anticipated to address these issues, and initially, it showed a higher recovery rate than the erstwhile regimes. The rate of recovery through IBC fell to 20% in 2021 due to a pandemic-related suspension but improved to 40% in 2023. The study evaluates the effectiveness of various NPA recovery mechanisms in India, like Lok Adalats, DRTs, the SARFAESI Act, and IBC 2016. A comparative analysis using ANOVA and the Tukey HSD Test revealed that while the mean recovery rates for Lok Adalats and DRTs were similar, significant differences were found between IBC and DRTs, SARFAESI and DRTs, IBC and Lok Adalats, and SARFAESI and Lok Adalats. No significant difference was observed between Lok Adalats and DRTs or between SARFAESI and IBC. The study notes that the IBC has been operational for just over seven years, limiting the data available for comparison. It suggests that future research should extend the time frame for a more comprehensive analysis of NPA recovery mechanisms.