Abstract
This article analyses whether a credit ecosystem that enhances the recovery rate of default debt by providing a time-bound method to address insolvency impacts collateralized borrowing. To explore this, we utilize the adoption of the Insolvency and Bankruptcy Act 2016 as a quasi-natural experiment in India. Using a propensity score-matched difference-in-differences approach, our findings demonstrate an increase in secured debt for financially-distressed firms more than non-distressed firms in the post-regulation period. In addition, we show that smaller and less profitable distressed firms experience the most aggressive response to secured debt.
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Notes
The fraction of the collateral that the bank can expect to recover at the time of liquidation.
As per Economic Survey 2021–2022, the recovery rate under IBC is 45.5%, while 26.7% under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFASEI), 4.1% under Debt Recovery Tribunal (DRT) and 6.2% under Lok Adalat.
Although, it is must to complete CIRP within 330 days but the pre IBC period (Sick Industries Companies Act (SICA)) cases got admitted under IBC (The Quarterly Newsletter of the Insolvency and Bankruptcy Board of India report (2020) shows that 72.46% of cases yielding in liquidation were earlier under SICA and or defunct) and court discretion under Article 14 of the constitution of India leads to delay in the timely completion of CIRP. https://ibbi.gov.in/uploads/publication/7e9b78bf6eba5254d788c8323055224f.pdf.
https://ibbi.gov.in/uploads/publication/3a3e6013ea3e0b73d5a3575d5c38b9c5.pdf.
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Singh, R., Chauhan, Y. & Jadiyappa, N. Does an effective bankruptcy reform increases collateralized borrowing? Evidence from a quasi-natural experiment in India. J Regul Econ 63, 74–86 (2023). https://doi.org/10.1007/s11149-023-09458-x
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DOI: https://doi.org/10.1007/s11149-023-09458-x