These are valid concerns regarding the functioning of the IBC once a firm enters insolvency proceedings. However, these very features determine what lenders expect to recover upon default and, consequently, shape the terms on which they extend credit before any default occurs. Thus, evaluating the IBC primarily through resolution outcomes provides only a partial picture of its effects. We, therefore, look beyond the insolvency process to examine how the reform affected firms that never entered insolvency proceedings.
In its early years, the IBC was widely credited with improving India’s previously dysfunctional corporate insolvency resolution framework. Before the IBC, creditors recovered barely a quarter of the value of distressed assets, while resolution often took more than four years, according to the World Bank’s Doing Business 2015 report. By 2020, recovery rates under the IBC had risen to over 45 per cent, while average resolution time had fallen to around 413 days, a remarkable turnaround from the multi-year delays of the past. This early period provides a useful setting for understanding the effects of improvements in the insolvency resolution process, before subsequent challenges weakened these gains.
Quicker resolution reduced the deadweight costs associated with lengthy bankruptcy proceedings, while higher recovery rates strengthened lenders’ confidence in the enforceability of their claims. With lower expected losses in the event of default, lenders had greater incentives to expand the supply of credit and lend at a lower cost than before. Research supports this argument.In a 2021 paper published in the Journal of Corporate Finance, Bose, Filomeni, and Mallick document that the IBC expanded the availability of low-cost credit to distressed firms.
Distressed firms, in turn, had an incentive to use their additional borrowing capacity to finance risky projects. Why? Because if such projects succeeded, the resulting improvement in cash flows could allow firms to avoid default. Consistent with this possibility, Singh, Chauhan, and Jadiyappa (2022), in a paper published in Finance Research Letters, document that the IBC induced distressed firms to take on more risk than non-distressed firms, with the increase in risk-taking accompanied by improved operating performance. These results suggest that a bankruptcy law that rapidly resolves insolvency, as the IBC did during its initial years, can both enable creditors to recover a larger fraction of their dues more quickly and improve the prospects of distressed firms.
These findings should not, however, imply that the IBC mattered only for distressed firms. The reform could also have affected the financing and investment decisions of relatively healthy firms. How? By improving expected recovery for lenders and making the insolvency process more time-bound, the IBC may have increased the amount of credit that lenders were willing to extend against a given pool of collateral. Firms with a greater stock of collateralisable assets could then have accessed additional debt to finance value-enhancing activities such as capital-goods imports, which can serve as a source of technological upgrading. We tested this hypothesis and found that, following the introduction of the IBC, import-dependent firms with more pledgeable assets borrowed more and used the additional funds to increase their capital-goods imports by about 31 per cent relative to otherwise comparable firms.
Put together, these findings suggest that the IBC has consequences even for firms that never enter insolvency. Its influence, however, depends on lenders perceiving it as a credible mechanism for timely recovery. Recent evidence of prolonged insolvency proceedings raises concerns in this regard. According to the Insolvency and Bankruptcy Board of India newsletter for the April-June 2026 quarter, the average time taken to complete a restructuring process was 1,026 days, while the average liquidation process took 1,378 days. Such delays may undermine lenders’ confidence in the framework, with implications for the supply and cost of credit. Weaker confidence could, in turn, affect firms’ access to external finance, constrain investment by viable firms, and increase the likelihood of default among financially weaker firms.
The IBC should, therefore, be judged not only by what happens when firms default, but also by how the prospect of default shapes the behaviour of firms and lenders before it occurs. Its greatest contribution may lie not in resolving insolvency after the fact, but in changing behaviour before it does. For that to happen, however, the promise of timely resolution must remain credible.
The writers are, respectively, assistant professor at the Indian Institute of Management, Ranchi;assistant professor at TAPMI, Bengaluru; and assistant professor at the Indian Institute of Management, Raipur. The views are personal
