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<p>India introduced the “Insolvency and Bankruptcy Code” (IBC) in 2016 to enhance creditors’ rights and make the resolution of claims cost and time-efficient. We conduct an enquiry into the impact of IBC on the quality of loans disbursed by the banks. Lending to prospective insolvent borrowers deprives proficient firms of access to credit, which leads to the problem of credit misallocation and is a setback for economic growth. IBC was introduced to reduce such “distress” or “zombie” lending. Taking the firm loan-level data from the website of the Ministry of Corporate Affairs, we find that the implementation of IBC led to a reduction in overall credit supply by banks. However, it is observed that inadequately capitalized banks, mostly the public sector banks, did not reduce the credit supply to distressed and zombie firms. We conclude that unless the banks are adequately capitalized, an overnight chronicle like IBC is also not effective in improving the quality of the credit supply.</p>

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Impact of insolvency and bankruptcy code on public sector banks through credit lending channel. Indian experience

  • 期刊论文

  • 发表日期：

    2026年1月27日

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  • Ankita Prabhakar,
  • Prasenjit Chakrabarti

摘要

India introduced the “Insolvency and Bankruptcy Code” (IBC) in 2016 to enhance creditors’ rights and make the resolution of claims cost and time-efficient. We conduct an enquiry into the impact of IBC on the quality of loans disbursed by the banks. Lending to prospective insolvent borrowers deprives proficient firms of access to credit, which leads to the problem of credit misallocation and is a setback for economic growth. IBC was introduced to reduce such “distress” or “zombie” lending. Taking the firm loan-level data from the website of the Ministry of Corporate Affairs, we find that the implementation of IBC led to a reduction in overall credit supply by banks. However, it is observed that inadequately capitalized banks, mostly the public sector banks, did not reduce the credit supply to distressed and zombie firms. We conclude that unless the banks are adequately capitalized, an overnight chronicle like IBC is also not effective in improving the quality of the credit supply.