Prior to 2016, India operated with a patchwork of archaic bankruptcy laws, codes, and statutes, including the Sick Industrial Companies (Special Provisions) Act, 1985 and Recovery of Debt Due to Banks and Financial Institutions Act, 1993. The fragmented nature of this legal framework led to numerous loopholes, inefficiencies, and weak enforcement. Authorities and creditors struggled to identify stakeholders, and, even if identified, creditors faced near insurmountable challenges to settling loan disputes with debtors. After Prime Minister Modi came to power, India was ready to repeal the old laws and replace them with a comprehensive law to address India’s growing problem with non-performing loans.
To govern all insolvency and bankruptcy proceedings and bring creditor rights in line with global standards, the country passed, in 2016, its first Insolvency and Bankruptcy Code, which established a regulatory body – the Insolvency and Bankruptcy Board of India – with the power to adapt to India’s dynamic economy. The insolvency process can be initiated by either creditors or debtors. Under the Code, the Debt Recovery Tribunal deals with insolvency of individuals and partnership firms, while the National Company Law Tribunal (“NCLT”) handles corporate insolvency by appointing insolvency practitioners to manage the process and take control of the affairs of the debtors.
Efficiency was one objective: Whereas creditors previously could expect to spend years in the Indian courts, insolvency resolution is now mandated to be completed within 180 days, extended to 330 days by a 2019 amendment. Another objective was allowing creditors to play a role. Once the resolution process is initiated against a corporate debtor, a Committee of Creditors is formed to evaluate and approve resolution plans.
The new law could not have come soon enough for India to deal with a growing class of entrepreneurs who had become accustomed to taking risks, sometimes with negative consequences. One such individual was Vijay Mallya, co-founder of Kingfisher Airlines. By 2012, Kingfisher, which had lost its license to operate several years prior, stopped paying employees. By 2014, it had become a tax delinquent, the largest non-performing asset on the books of state banks. In 2016, Mallya fled to the UK, leaving his Kingfisher Airlines more than USD 1 billion in debt. The following year, a group of banks in India obtained a judgement of over USD 1 billion against him, yet, nearly a decade on, Mallya remains in the UK, evading extradition.
The promise of quick completion has proved to be a mirage. Despite calls for structural reforms and better staff training, a lack of judges and a paucity of competent administrative personnel have created a significant backlog. The average corporate insolvency is resolved in 580 days: one year and seven months. The average liquidation takes one year and five months. Recent reports suggest it takes Indian courts an average of 821 days – two years and three months – to approve a resolution plan. Some critics contend the Code gives insolvency practitioners too much authority and fails to safeguard the rights of companies.
While not as efficient as promised, India’s new bankruptcy law has allowed lenders an opportunity to extract greater value through resolution, instead of forcing companies into liquidation. In 2024 India’s domestic rating agency, the Information and Credit Rating Agency, estimated that more than 8,000 corporate debtors had gone through liquidation or the corporate insolvency resolution process under the Code. Analysts have noted that the Code has changed behavior: corporate debtors resolve problems in the inchoate stages of default rather than risk losing control in a creditor-initiated bankruptcy. This trend is notable among India’s family-owned companies, where founders are keen to maintain control of their businesses for future generations. Overall, firms that chose debt resolution proceedings under the Code experienced significant improvements in profitability and liquidity during the post-resolution period, according to a 2023 report by the Indian Institute of Management Ahmedabad.
While corporate India’s future may be improving, the country’s fastest growing problem is with household debt. The middle class has taken on an increasing amount of personal debt in recent years. Measurements vary, but reports of total household debt range from 25% to 41% of GDP. This may be attributed, in part, to the post-COVID economy in which it has been less common for small groups, typically four to six women, to obtain loans collectively, with joint liability amongst the group members. But it also reflects the buy-now, pay-later mentality of an aspiring younger generation, which has caused credit card transactions to more than double in the past five years. Meanwhile fintech companies have been quick to satisfy the demand for small personal loans, sometimes termed microfinance loans, often given without collateral to borrowers who would be turned away by traditional banks. Altogether, this debt contributes to India’s estimated $45 billion subprime loan industry. Some economists have expressed concern that consumer debt could stymie India’s aspirations to achieve high-income status by 2047.
Another problem is that while India has improved the mechanisms for creditors to legally recover debts, it lacks clear guidelines on enforcement of debt collection. In February 2025, after a slate of suicides blamed on aggressive debt collection practices, Karnataka’s state government took steps to protect borrowers from harassment by debt collectors. A new ordinance allows borrowers to file complaints against debt collectors, which could trigger a police raid on lenders with bad loan recovery practices.
Mindful of the above, it is imperative that investors seek a full understanding of their counterparties in India before financial difficulties emerge. Questions include: How much exposure is there to non-traditional or subprime borrowers? and What assets can the counterparty offer as collateral within and outside of India? To truly understand a counterparty’s creditworthiness, inquiries could also be made with suppliers, customers, and industry sources familiar with the counterparty.
