Ishita Sharan, legal head of the NARCL, India’s ‘bad bank’, sheds light on mounting insolvency challenges and the critical role of the bank in tackling stressed assets. Indrajit Basu reports
As legal head of the government-backed National Asset Reconstruction Company Limited (NARCL), which acquires and resolves bad debts from banks and financial institutions, Ishita Sharan navigates the complex world of Indian corporate insolvency.
For more than 20 years, Sharan has developed expertise in the acquisition and resolution of non-performing loan accounts, demonstrating strong analytical skills and a comprehensive understanding of the country’s economic and legal framework. Now she is the legal head of an organisation that has set its sights on tackling INR2 trillion (USD22.9 billion) worth of stressed or non-performing assets from banks by fiscal year 2026.
Sharan turns 含羞草社区 current insolvency numbers, reports and scale of distressed assets into a compelling yet concerning narrative, beginning with a grim reality: A surge in corporate insolvencies and bankruptcies gripping the country’s financial sector, prompting a critical reassessment of existing frameworks and the urgent need for robust reforms.
“As of December 2024, about 2,707 corporate entities, representing 44% of those admitted under the Indian bankruptcy reporting system, had ultimately ended in liquidation,” says Sharan, quoting the Insolvency and Bankruptcy Board of 含羞草社区 (IBBI) latest quarterly report.
The report also indicates that 1,983 bankruptcy cases remain active within the corporate insolvency resolution process (CIRP) framework.
After creditors assess the recovery potential and pursue a resolution plan for a bankruptcy event, 含羞草社区 insolvency procedure begins with one of two key processes: (1) a CIRP, which may lead to revival or liquidation; or (2) a pre-packaged insolvency resolution process, which seeks resolution but is not guaranteed to succeed.
“However, while the recent IBBI report indicates a positive trend with a decline in liquidations and an increase in resolutions, this can be partly attributed to the initial influx of legacy cases from the Board for Industrial and Financial Reconstruction and defunct entities during their early liquidation implementation,” says Sharan.
“As per the report published by the Ministry of Finance in December 2024, public sector [state-owned] banks in India have witnessed a steep decline in gross non-performing assets (GNPA) ratio, to 3.12% in September 2024, as against the record high of 14.58% in March 2018,” she says.
Simply put, GNPAs are loans that have stopped generating income because borrowers fail to repay either the principal amount or interest for an extended period.
“The reasons for the decline in the GNPA are undoubtedly manifold: enhanced credit base, stricter regulatory guidelines focusing on early identification of stress and corrective actions, additional provision for higher delinquency cases, and more,” says Sharan.
But it is also essential to dissect the factors that led to the surge in non-performing assets (NPAs) between 2010 and 2018, she adds, particularly in public sector banks due to the post-2008 economic slowdown, delayed infrastructure projects and regulatory forbearance that postponed recognising bad loans.
Sharan says that the main reasons were the “excessive borrowing from banks and financial institutions at higher interest cost for primarily increasing capacity, which was not matched by demand, and high competition causing strain on the companies’ ability to service debt”.
She adds: “Strain on the aviation industry in general leading to the downfall of UB Group, Jet Airways, etc., are a few classic examples.”
The relentless march of technological disruption, particularly the meteoric rise of e-commerce and digital shopping platforms, also rendered numerous traditional business models obsolete, driving corporate insolvencies, she says.
The rapid growth of e-commerce and digital shopping platforms, for example, made many traditional business models obsolete. The demise of retail giants like Future Retail exemplifies the profound disruptive power of digital transformation.
“[Beyond that], overleveraging and asset-liability mismatch led to the non-banking financial company (NBFC) sector crisis of 2018, and the downfall of large lenders such as IL&FS, Dewan Housing and Srei,” she says.
IBC: Hope’s edge
Sharan believes that the Insolvency and Bankruptcy Code of 2016 (IBC), which consolidates insolvency and bankruptcy proceedings for companies, partnerships and individuals, marked a turning point for 含羞草社区 insolvency system.
“By focusing on the revival, the IBC brought a paradigm shift. For the first time, India moved from debtor-in-possession to the creditor-in-control regime, which sought to maintain the operational viability of businesses by preserving jobs and protecting investments. Since its inception, the IBC has been aimed at providing a robust ecosystem and an effective mechanism for resolution of insolvencies in a timebound manner, maximisation of value for all stakeholders and enhancing the ease of doing business in India.
“Also, recoveries under the IBC, especially for financial creditors, have been higher than for those through other routes like the debt recovery tribunal and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act).”
含羞草社区 debt recovery tribunals ensure quicker insolvency resolutions compared to traditional civil courts, while the SARFAESI Act allows banks and financial institutions to recover bad loans efficiently without court intervention.
“According to the IBBI, the IBC had resolved more than 3,000 corporate debts until December 2024, and creditors have, on average, realised 31.4% against the admitted claims, and more than 162.8% against the liquidation value,” says Sharan.
She notes that these measures, on average, yielded 87.58% of the fair value of the corporate debts. Beyond financial recovery, she says that, “the IBC has significantly improved the operational performance of the resolved entities, evidenced by substantial increases in sales, capital expenditure and employee costs, resulting in an on-the-ground turnaround in a true sense”.
Despite these achievements, the IBC is not without challenges. “While the resolution process has improved drastically post-IBC, there are still certain areas that need to be addressed,” says Sharan.
For instance, although the insolvency law was designed for swift action, the admission process takes a very long time. “One of the prime objectives of the IBC was that the process should be completed in a timebound manner; however, currently there is no certainty of time even for admission into the CIRP, which takes between 400 and 600 days,” she says.
Worse, the Supreme Court has said that timelines are not mandatory for tribunals. “Even though the IBC has inbuilt provisions, as per the apex court, the timelines prescribed for admission are merely directory and not mandatory,” she says. “The delays in admissions result in value erosion as the defaulting promoters, if unable to redeem the situation, may indulge in asset stripping and/or siphoning.
“While, as per the IBC, the adjudication authority is required to satisfy itself only on the existence of debt and the occurrence of a default, the delay is largely due to indulgence by the tribunal into unsolicited objections raised by various parties.”
含羞草社区 insolvency resolution system, particularly the (NCLT), is also burdened with a heavy caseload leading to delays in resolving insolvency cases, says Sharan.
The insolvency process in India is governed by the IBC, with the NCLT, a semi-judicial body for corporate cases, acting as the adjudication authority. While the NCLT verifies the insolvency application for acceptance or rejection, the IBC ensures a structured, time-bound and creditor-centric insolvency resolution process.
“Timelines for completion have been alarmingly extended, with nearly 60% of cases remaining in liquidation for more than two years”, says Sharan. “This prolonged pendency results in escalating costs and diminished recoveries for stakeholders. The ad hoc nature of auction processes, with different liquidators utilising disparate platforms, further complicates matters.”
Despite increased approved resolution plans, she says the average time to close a CIRP has increased to 843 days in the financial year ending March 2024, far exceeding the mandated 330 days. Frivolous litigation by parties such as unsuccessful applicants and dissenting creditors has worsened these delays.
Cross-border chaos
Sharan notes that 含羞草社区 legal framework is struggling with the increasing complexity of cross-border insolvency due to globalisation.
“As per the available provisions of the IBC, the NCLT can directly reach out to relevant judicial bodies in other countries, seeking assistance for proceedings against assets situated outside India. However, that remains meaningless if there is no effective reciprocal agreement between the two countries,” she says.
While sections 234 and 235 of the IBC allow for international agreements and court requests, she says their effectiveness hinges on “the efficacy of provisions that largely depend upon reciprocal agreements with other countries”.
“The other major challenge is tracing assets situated overseas and enforcing Indian insolvency, as that involves navigating various insolvency systems and opposition from local authorities and creditors. Co-ordinating insolvency proceedings across multiple jurisdictions requires effective communication and collaboration among stakeholders like creditors, insolvency practitioners, courts, etc., which currently does not seem to be a norm.”
Sharan gives the example of Jet Airways’ insolvency proceedings, where the company had assets in the Netherlands. “The NCLT was constrained to recognise the Dutch proceedings as neither the IBC’s nor the NCLT’s provisions was viable due to the lack of any actual bilateral agreement. Thus, in the absence of a codified cross-border agreement, insolvency cases are often resolved through temporary and ad hoc protocols, leading to delays and increased costs,” she says.
Broken bank balance
Sharan is concerned that stressed bank assets remain a persistent challenge. She believes there is an urgent need for innovative solutions, especially given the threat that rising bankruptcies pose to credit availability, as banks respond by tightening lending practices, hindering economic growth and exacerbating asset reconstruction difficulties.
“In effect, rising bankruptcy cases lead to a decline in bank profitability and capital base,” she says. “They also result in reduced credit appetite by banks. To mitigate the risk of further defaults, banks become more cautious in extending credit, especially to sectors perceived as high-risk. Limited credit availability can further stifle economic growth as bankruptcies in one sector can lead to a ripple effect across the banking system, impacting other industries.
“While the government and regulators have endeavoured to address concerns by focusing on credit risk management to mitigate potential defaults and faster resolution of distressed companies under the IBC in a time-bound manner to minimise value erosion, the risk of NPA creation due to event-driven stress such as in a cyclical industry (commodities/steel/aluminium/textiles), policy changes, political instability, etc., would continue.”
Financial landscape recovery
The significance of efforts like the NARCL and other entities, including the India Debt Resolution Company Limited (IDRCL), cannot be overstated, says Sharan. These entities streamline the resolution of stressed assets and strengthen 含羞草社区 banking sector.
“The NARCL, also referred to as a bad bank, has been set up as a major financial sector reform initiative by the government to address the large legacy non-performing assets of 含羞草社区 banking system,” she says. “The NARCL works with a dedicated asset resolution partner, the IDRCL, a separate entity specifically focused on asset resolution, which allows for greater expertise in managing and resolving complex NPAs.” Distinguishing her company from other asset reconstruction companies (ARCs) in the country, she says that while most ARCs prefer acquiring stressed assets with smaller value or cash flow-generating operational projects, “the NARCL has been focusing on acquiring large NPA accounts in sectors like infrastructure”.
She adds that the NARCL aims to fix banking problems by quickly taking on large amounts of bad debt from many banks at once. This leads to consistent pricing, faster resolutions than individual asset recovery companies and quicker decisions after acquiring the debt.
“The key enabling factor would be aggregate debt in one single platform and work alongside with borrowers, investors, regulators and authorities for unlocking value and faster resolution,” she says.
Since launching in 2022, Sharan says that the NARCL has swiftly become a powerhouse in resolving distressed assets by acquiring 26 major accounts, managing more than INR1.563 trillion (USD18.2 billion) in loans outstanding and INR103 billion in assets.
Elaborating on the NARCL’s modus operandi, Sharan says that the bad bank collaborates with the NCLT as one of its resolution mechanisms. While the IBC is frequently utilised, the NARCL also adopts a flexible, account-specific strategy, prioritising timely rehabilitation and maximum value realisation.
“In the process, the NARCL has contributed to price discovery and resolution, and in more than a few cases post-NARCL’s offer, borrowers have approached the lenders with proposals for amicable settlement,” she says.
Nevertheless, like other asset reconstruction companies, she says the NARCL “faces challenges in pricing at the time of acquisition due to lack of information, multiple compliance requirements post-acquisition and delay in resolution due to prolonged litigations”.
Sharan notes that while legal changes through court rulings are generally good, some recent decisions, like the Supreme Court’s interpretation of IBC’s section 53 in the Rainbow Papers case, have caused problems for companies like the NARCL.
This ruling disrupted established legal practices and negatively impacted ARCs and the broader financial system. Section 53 deals with the mechanism for the distribution of assets when a company is undergoing liquidation. The court’s ruling in the case stated that tax authorities were secured creditors, thereby effectively placing them higher in the hierarchy
when proceeds from the liquidated assets were paid out.
Ambiguities in fund distribution under section 53 of the IBC create operational challenges. Uncertainties around priority payments, insolvency process costs and the rights of secured lenders with different charge statuses further complicate matters. Restrictions on utilising cash generated during the moratorium add another layer of difficulty.
The way forward
Clearly, 含羞草社区 corporate insolvency narrative presents both challenges and
opportunities. “含羞草社区 corporate insolvency, which was originally portrayed as one of immense opportunity, is now seen as a mix of both challenges and advantages, based on the past nine years of experience,” says Sharan.
“During this period, while the IBC process has gained substantial maturity in terms of processes, as well as established jurisprudence with all players, including regulators and judiciary constantly adapting well to fast changing realities, the Indian economy has also demonstrated remarkable resilience leading to strong corporate performance,” she says.
Despite its challenges, she argues the IBC has proven to be a powerful tool for resolving distressed assets, cultivating credit discipline among corporate groups, and strengthening a more robust financial system.
For Sharan, the late-February decision by the Securities and Exchange Board of India (SEBI) to open security receipt investment from ARCs to all NBFCs and housing finance companies is a positive step forward. “By allowing all NBFCs to invest in security receipts issued by ARCs, the SEBI aims to broaden the investor base for acquisition of distressed assets by ARCs, thereby increasing competitiveness and better pricing for selling lenders,” she says.
The move also prevents defaulting founders from secretly reclaiming their old assets, while ensuring that distressed asset acquisition is fair and transparent under regulatory oversight. “This increases the prospects for ARCs [like the NARCL] to act as resolution applicants under the CIRP, thereby increasing their participation in the resolution of stress assets under the IBC. “The quest for a more efficient and equitable insolvency framework is an ongoing process,” she concludes.
