Kotak Institutional Equities has reported positive news for India’s banking sector, stating that corporate India remains in good financial health, with no new signs of stress. According to Kotak, many companies have successfully reduced their debt, which has contributed to this stability.
Even though the average time for resolving insolvency cases has been increasing, now standing at around 23 months, the number of new cases being filed is decreasing. In the first quarter of FY25, 246 new insolvency cases were admitted, consistent with the previous year’s rate but much lower than the peak of 1,990 cases in FY2020. The total number of ongoing cases has remained stable, between 1,900 and 2,000 over the past year.
Kotak highlighted that the decline in new cases and the resolution of legacy issues mean that the number of cases and outstanding claims is likely to stay low. However, there has not been a significant surge in new investments or asset price increases that could impact banks’ asset quality in the near future.
The Insolvency and Bankruptcy Code (IBC) has become more important in recent years. While operational creditors used to file the majority of new cases, financial creditors are now responsible for a larger share. As of Q1FY25, around 40% of admitted cases were from manufacturing, 18% from real estate, 7% from construction, and 13% from retail and wholesale trade.
Kotak’s report also pointed out that liquidation is the most common outcome for cases under insolvency, accounting for about 44% of closed cases. As of June 2024, around 68% of ongoing cases had passed the 270-day mark since admission, and another 10% had crossed 180 days. Therefore, the number of cases facing liquidation is expected to remain high.
Only 17% of cases have been resolved, with an average haircut of around 68% on admitted claims. The total debt resolved through the IBC amounts to approximately ₹10.6 trillion. In Q1FY25 alone, ₹125 billion in debt was resolved, with realizations of ₹40 billion (around 30%). While the average recovery rate for financial creditors is around 68%, the amount recovered relative to the liquidation value is higher, at approximately 160%.
Despite these improvements, the banking system still holds a significant number of bad assets, meaning there is still much work to be done. The average time for resolving cases that ended with a resolution plan has steadily increased to around 685 days.
This report from Kotak underscores that while progress has been made in resolving stressed assets, challenges remain, especially in sectors with weaker demand and incomplete projects.
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