The effectiveness of the insolvency framework must be enhanced to accelerate recovery timelines that have been stretched beyond their stipulated deadlines, the Economic Survey 2025-26 said on Thursday, highlighting that it would take almost 10 years to clear the current case backlog.
The survey acknowledged that the bankruptcy law has contributed to improved credit discipline, a reduction in bank bad loans and greater predictability in case outcomes.
The pre-packaged insolvency resolution process (PPIRP) for micro, small and medium enterprises (MSMEs) has failed to take off, the survey noted, with only 14 cases admitted in the past four years. The low use of the pre-pack route was due to complex procedures that are not suited for small companies, poor awareness among MSME promoters and lenders, lack of trust in promoter-led resolutions, and the inability of stressed businesses to afford the cost of the process.
Introduced in 2021 after the covid-19 shock, the pre-pack framework was meant to provide troubled MSMEs a fast-track option to resolve debt. Under this system, a company and its lenders first agree on a rescue plan and then seek approval from the National Company Law Tribunal.
Unlike the normal insolvency process, the MSME promoter continues to run the business, while a resolution professional supervises the process. Only MSMEs with defaults ranging from ₹10 lakh to ₹1 crore are eligible, and the approval of at least 66% of the financial creditors is required. The law provides for completion of the process within 120 days.
The survey also highlights serious capacity constraints under the Insolvency and Bankruptcy Code (IBC). As of March 2025, the NCLT had a backlog of almost 30,600 cases, implying a clearance time of about 10 years at the current disposal rates. There are only 30 NCLT benches across the country, and 2,198 of the 4,527 registered resolution professionals are active.
“Such extended timelines can trigger value erosion—assets deteriorate, employees depart, customers shift to competitors, and supplier relationships break down,” the survey said, adding that delays undermine the code’s core objective of time-bound resolution.
Credit discipline
At the same time, it credited the IBC with improving recoveries and credit discipline. In 1,300 resolved cases, creditors recovered ₹3.99 lakh crore.
“Creditors recovered 94% of the fair value of resolved businesses, and 170% of what they would have received through liquidation,” the survey said.
The survey said the IBC has helped reduce stress in the banking system. Overdue corporate loans have fallen from 18% of the total outstanding in 2018 to 9% in 2024, and banks’ net non-performing asset ratios have declined by about one percentage point, showing faster resolution of stressed accounts and better repayment discipline.
Reflecting these improvements, S&P Global Ratings upgraded India’s insolvency framework to Group B in December 2025 from Group C, citing higher recovery rates and quicker resolution timelines.