A recent study, utilizing data from NeSL (corporate loans, 2018–2024), IBBI (insolvency proceedings, 2017–2023), CMIE Prowess (firm financials, 2010–2024), and RBI (bank NPAs, 2010–2024), highlights significant changes in India’s credit ecosystem following the Insolvency and Bankruptcy Code (IBC). The research indicates a substantial decrease in the volume and monetary value of ‘Overdue’ corporate loan accounts, suggesting improved borrower payment discipline. While ‘Default’ account proportions remain stable, creditor confidence has increased, with the ratio of aggregate default to overdue amounts rising from 27% in 2018 to 80% in 2024, reflecting a greater readiness to address non-performing borrowers. A nearly 1% reduction in net NPAs to net advances was also observed. Analysis of loan account transitions reveals an increase in movements from ‘Overdue’ to ‘Normal’ status, indicating an improved credit culture. Mean transition times across all categories have shortened considerably; for example, ‘Overdue’ to ‘Normal’ transitions now average 30-87 days, down from 248-344 days in 2019-2020. Firms that default typically show higher leverage, increased short-term debt, and poorer profitability, often being smaller and funded by Public Sector Undertaking (PSU) banks. Post-IBC, average firm leverage has declined (0.4% overall, 0.7% long-term), suggesting a cautious demand-side response. Distressed firms, however, experienced increased leverage, mainly short-term, but also saw a roughly 3% reduction in their cost of debt. Corporate governance improved, with more independent directors, particularly in distressed firms. In summary, the study concludes that the IBC has driven significant behavioral changes, fostering better credit monitoring, reduced debt accumulation, increased debt settlements, and more efficient debt recovery by banks.
Behavioral Impact of IBC
April 30, 2025
Centre for Capital Markets and Risk Management
A Research Study Submitted to Insolvency and Bankruptcy Board of India
Indian Institute of Management, Bangalore
Executive Summary
Our study uses the NeSL dataset spanning 2018–2024 on corporate loan accounts which captures periodic filings by creditors on key metrics of loans issued to corporate debtors.1 We also incorporate data on corporate insolvency resolution proceedings (CIRPs) from the IBBI dataset for the period 2017–2023, firm-level financial data from CMIE Prowess for the period 2010–2024 and data on non performing assets (NPAs) for banks from RBI for the period 2010–2024.
A major finding of our study is that the volume of accounts deemed ‘Overdue’ has reduced significantly, both in terms of the Rupee amount as well as in terms of the number of accounts.2 Our interpretation is that the passage of the IBC has injected discipline in the credit allocation process and has prompted borrowers to adhere to stipulated payment schedules. However, we do not observe a comparable reduction in the volume of accounts labeled as ‘Default’, proportions of which have remained broadly stable in our sample period. We show that the proportion of ‘Default’ accounts has declined steadily after spiking in 2020 but the outstanding default amount as a share of total debt has increased slightly. Interestingly, the proportion of aggregate default amount in the system to the proportion of aggregate overdue amount has steadily increased over the years from 27% in 2018 to 80% in 2024, indicating, in our opinion, that there is greater confidence among creditors to take errant borrowers to task, even in the case of large overdue amounts. Our findings reveal a significant reduction of around 1% in the ratio of net NPAs to net advances during the period 2010 to 2024.3
We evaluate a loan account’s transitions across four categories—‘Normal’ (N), ‘Overdue’ (O), ‘Default’ (D) and ‘Suit Filed’ (S)—over its life cycle. The yearly proportion of transitions from the Overdue category to the Normal category have increased over 2018–2024, supporting the view of an improvement in the credit culture of corporates. Transitions into the Default status do not show any such decreasing trend. We also show that mean transition times have reduced for all inter-category transitions and their variability across accounts has also fallen significantly. For example, it took on average 248–344 days for a loan account to transition from Overdue to Normal in 2019–2020, which has lessened to 30–87 days in 2023–2024. Similarly, in 2019–2020 an account spent, on average, 169–194 days in the Overdue category before it got classified as Default by the creditor, which subsequently reduced to 33–81 days in 2023–2024. Overall, such findings point towards a the success of IBC in reducing the time taken to resolve the delinquencies on behalf of creditors and debtors in one way or another, indicative of an efficient credit environment.
Merging NeSL data with firm-level data from Prowess, we offer evidence that firms that default show the following main characteristics (on average): i) higher leverage,4 ii) higher short-term debt, iii) lower unsecured debt. Further, such firms hold more fixed assets, are smaller in size, suffer from poorer profitability and are more likely to be listed, and funded by PSU banks. On the other hand, firms that withdraw from CIRP tend to show, on average, lower leverage and higher profitability.5 Interestingly, business group-affiliated firms are significantly less likely to withdraw once they enter the CIRP process, suggesting institutional or structural differences in how resolution strategies are pursued. Further, firms that successfully resolve defaults tend to experience subsequent improvements in profitability.
We also analyze changes in firm-level metrics on credit availability, cost of credit, and governance from pre-IBC period to post-IBC period. During our sample period 2010–2024, we show that for an average firm, leverage declined by 0.4% with long-term debt reducing by 0.7%. On the other hand, short-term leverage and unsecured leverage show an increasing trend in the same period. These patterns point to a strong demand-side response, where firms appear more cautious about taking on excessive debt in light of the IBC’s disciplining mechanisms. However, for the pool of distressed firms, we show that leverage has significantly increased post-IBC in comparison to non-distressed firms, primarily driven by an increase in short-term debt.6
We find no significant impact on firms’ cost of debt but show that for distressed firms there is around 3% reduction in their cost of debt post IBC (vs. non-distressed firms) indicating an improved credit environment for distressed firms. In terms of governance, we show that the average proportion of independent directors has increased by around 2.8% post-IBC, with the increase being more significant for distressed firms.
To summarize, our study offers evidence—based on data shared by the information utility NeSL—that the implementation of the IBC by the regulator IBBI has brought about significant behavioral changes in the credit ecosystem comprising corporates and banks. Credit monitoring has improved, overdue accounts have fallen in number and there is a systematic reduction in firms’ use of debt, especially long term. We also find that there is an increasing tendency to settle debts to avoid the CIRP proceedings, which we interpret as a positive sign. Finally, banks have also shown to efficiently use the new legal apparatus for debt
recovery—either by resolution or by liquidation. We find these changes in the firm and bank behavior heartening and suggestive of the positive impact of IBC on the lender-borrower ecosystem in India.
NOTES
1We analyze loans for which the outstanding amount exceeds |1 Cr (Amendment 2020). We further validate our results after the inclusion of the full sample of loans.
2Amount overdue on overdue accounts as a percentage of total amount outstanding on all accounts reduced from 18% in 2018 to 9%. Number of overdue accounts has reduced from 22% of all accounts to 15% of all accounts.
30.96% to be exact.
4Firms that recover from default display an average leverage of 56% and those that stay in default have
an average leverage of 86%.
5On a related note, firms which transition away from default and do not fall into CIRP proceedings tend to show lower leverage, lower short term and unsecured debt levels.
6Firms having an interest coverage ratio below 1 and financial leverage in the highest quartile are classified as distressed firms.
