Revamping India's Insolvency Framework: Lessons from the Economic Survey 2025-26

India's corporate distress resolution landscape has undergone a profound shift since the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016. The latest Economic Survey 2025-26 underscores this transformation, praising the regime for fostering greater accountability among borrowers, slashing non-performing assets in banks, and enabling higher creditor recoveries. Yet, it pulls no punches on persistent bottlenecks, prolonged timelines, institutional capacity shortages, and the near-dormant pre-packaged process for micro, small, and medium enterprises (MSMEs).

At its core, the IBC replaced a patchwork of outdated laws with a time-bound, creditor-driven mechanism aimed at reviving viable businesses or swiftly liquidating unviable ones. The results are tangible. From approximately 1,300 successfully resolved cases, creditors have recovered ₹3.99 lakh crore. This equates to 94% of the fair market value of the businesses and a striking 170% of what liquidation would have yielded. Overdue corporate loans, which hovered at 18% of total advances in 2018, dropped to 9% by 2024. Banks' net non-performing asset ratios have also eased by about one percentage point, reflecting healthier balance sheets and stronger repayment cultures.

These gains have earned global recognition. In December 2025, S&P Global Ratings elevated India's insolvency framework from Group C to Group B, citing improved recovery rates and somewhat quicker processes compared to peers.

However, the survey flags a critical flaw: resolutions are routinely missing statutory deadlines, eroding asset value through deterioration, lost customers, staff attrition, and severed supply chains. As of March 2025, the National Company Law Tribunal (NCLT) grappled with nearly 30,600 pending cases. With only 30 benches nationwide and just 2,198 active out of 4,527 registered resolution professionals, clearing the backlog at current rates would take nearly a decade. Such delays undermine the IBC's promise of predictability and value maximisation.

Particularly worrisome is the underutilization of the Pre-Packaged Insolvency Resolution Process (PPIRP), introduced in 2021 as a lighter-touch option for MSMEs facing defaults between ₹10 lakh and ₹1 crore. Designed for debtor-creditor consensus upfront, requiring 66% financial creditor approval and aiming for closure in 120 days, PPIRP has seen a mere 14 admissions in four years. The survey attributes this to procedural intricacies ill-suited for smaller firms, limited awareness among promoters and lenders, skepticism toward debtor-in-possession models, and prohibitive upfront costs that cash-strapped entities simply cannot bear.

The implications for MSMEs, which form the backbone of India's economy, are stark. Unlike larger corporations, these businesses often lack the bandwidth for complex legal navigation, making early intervention vital to prevent cascading failures.

To address these gaps, the survey advocates structural overhauls rather than tweaks. Key suggestions include expanding NCLT capacity with commercially savvy members and robust support staff, streamlining MSME-specific pathways with minimal judicial oversight, and fostering seamless coordination among regulators to curb avoidable hold-ups. Recalibrating the pre-pack framework to truly simplify it, perhaps by reducing creditor thresholds or digitising workflows, could unlock its potential.

Ultimately, the IBC's success lies not just in resolutions achieved but in the deterrent effect it creates: borrowers now think twice before defaulting. Strengthening it further will bolster credit flows, especially to underserved MSMEs, and sustain India's growth momentum. As the survey aptly notes, faster, fairer resolutions are essential to turn corporate distress into opportunities for rebirth rather than prolonged agony.