"IBC Haircuts Explained: Recovery Rates, Valuation Gaps, and Creditor Concerns"
Haircut
The percentage difference between a creditor's admitted claim and the amount actually recovered under a resolution plan.
Fair Value
Estimated total value of a company's assets in their current condition, used as a benchmark in IBC proceedings.
The Insolvency and Bankruptcy Code (IBC), 2016 was a landmark reform in India's credit ecosystem. Before its enactment, lenders had to navigate a fragmented landscape of recovery mechanisms, Debt Recovery Tribunals (DRTs), SARFAESI Act proceedings, and Lok Adalats, each with low recovery rates and long timelines. The IBC consolidated these into a single, time-bound framework. It created the National Company Law Tribunal (NCLT) as the adjudicating authority and established the Insolvency and Bankruptcy Board of India (IBBI) as the regulator.
The Code operates on a clear hierarchy: resolution is preferred over liquidation, and liquidation is preferred over indefinite debt-limbo. This hierarchy reflects a policy choice, keeping productive assets alive and in use is better for the economy than breaking them up for scrap value. However, this preference for resolution has created a persistent tension with creditors' expectation of recovering what they are owed.
Over the years, the IBC has been amended multiple times to address procedural gaps, expand the definition of creditors, and refine timelines. The Standing Committee on Finance conducted a comprehensive review of the IBC in December 2025, bringing renewed attention to the recovery question.
A haircut in the context of insolvency refers to the difference between what a creditor is owed (the admitted claim) and what the creditor actually receives through the resolution process. If a bank is owed Rs 100 crore and receives Rs 30 crore under a resolution plan, the haircut is 70%. The higher the haircut, the greater the loss absorbed by the lender.
The IBC process begins when a creditor approaches the NCLT to initiate insolvency proceedings against a defaulting company. At least two registered valuers are appointed to determine two key figures: the fair value (estimated value of assets in their current condition) and the liquidation value (what creditors would receive if assets were auctioned). A third concept, enterprise value, captures what the company would be worth as a going concern. Potential buyers submit resolution plans benchmarked against these valuations. …
Which of the following statements best describes the term 'Scheme for Sustainable Structuring of Stressed Assets (S4A)', recently seen in the news?
Do you agree that the Indian economy has recently experienced V-shaped recovery? Give reasons in support of your answer.
Consider the following statements regarding the Insolvency and Bankruptcy Code (IBC), 2016:
1.The National Company Law Tribunal (NCLT) is the adjudicating authority under the IBC.
2.The Insolvency and Bankruptcy Board of India (IBBI) functions as the regulator under the IBC.
3.A resolution plan must be approved by a unanimous vote of the Committee of Creditors before being submitted to the NCLT.
4.At least two registered valuers must be appointed to determine fair value and liquidation value of the corporate debtor.
How many of the above statements are correct?
With reference to debt recovery mechanisms in India, consider the following pairs:
Mechanism | Recovery Rate (FY2023)
1.Lok Adalats | 2%
2.Debt Recovery Tribunals (DRTs) | 9.9%
3.SARFAESI Act | 39%
4.Insolvency and Bankruptcy Code (IBC) | 27.8%
How many of the above pairs are correctly matched?
Which of the following best describes the term 'haircut' in the context of the Insolvency and Bankruptcy Code (IBC)?
Consider the following statements regarding asset valuation under the IBC:
1.Fair value refers to the amount creditors would receive if the company's assets were sold through auction.
2.Enterprise value refers to what a company would be worth if it continues operating as a going concern.
3.Banks have argued that resolution plans should be benchmarked to enterprise value rather than liquidation value to reduce excessive haircuts.
Which of the statements given above is/are correct?
Assertion (A): The Government of India considers resolution, not recovery, as the primary objective of the Insolvency and Bankruptcy Code.
Reason (R): Admitted claims under the IBC often include non-performing assets already written off, accrued interest on NPAs, and guarantee obligations, making the claim figure an inflated baseline for measuring recovery.
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