Economic Survey 2025-26 Urges Overhaul of Insolvency Framework to Tackle Massive Backlog
The Economic Survey 2025-26, presented on Thursday, has issued a stark warning about the effectiveness of India's insolvency framework, calling for urgent enhancements to accelerate recovery timelines that have stretched far beyond stipulated deadlines. The survey reveals a daunting reality: at current disposal rates, it would take approximately 10 years to clear the existing backlog of cases under the Insolvency and Bankruptcy Code (IBC).
Severe Capacity Constraints and Value Erosion Risks
The survey highlights serious capacity constraints plaguing the IBC ecosystem. As of March 2025, the National Company Law Tribunal (NCLT) faced a backlog of nearly 30,600 cases. With only 30 NCLT benches operating nationwide and 2,198 of 4,527 registered resolution professionals currently active, the system is severely strained.
"Such extended timelines can trigger significant value erosion—assets deteriorate, employees depart, customers shift to competitors, and supplier relationships break down," the survey cautioned. It emphasized that these delays fundamentally undermine the IBC's core objective of ensuring time-bound resolution of stressed assets.
Pre-Pack Insolvency for MSMEs Fails to Gain Traction
A particularly concerning finding involves the pre-packaged insolvency resolution process (PPIRP) designed specifically for micro, small and medium enterprises (MSMEs). Introduced in 2021 as a fast-track option following the COVID-19 pandemic shock, this mechanism has largely failed to take off.
In the past four years, only 14 cases have been admitted under the pre-pack framework. The survey identifies multiple reasons for this poor adoption:
- Complex procedures ill-suited for small companies
- Poor awareness among both MSME promoters and lenders
- Lack of trust in promoter-led resolution plans
- Inability of financially stressed businesses to afford the process costs
Under the PPIRP system, eligible MSMEs with defaults ranging from ₹10 lakh to ₹1 crore can propose a rescue plan with lenders before seeking NCLT approval. Unlike standard insolvency proceedings, the existing promoter continues managing operations under supervision, with the entire process mandated to complete within 120 days.
IBC's Positive Impact on Credit Discipline and Recoveries
Despite these challenges, the Economic Survey acknowledged the bankruptcy law's substantial contributions to improving India's financial ecosystem. The IBC has fostered better credit discipline, reduced bank bad loans, and brought greater predictability to case outcomes.
In 1,300 resolved cases, creditors have recovered an impressive ₹3.99 lakh crore. This represents 94% of the fair value of resolved businesses and 170% of what would have been recovered through liquidation proceedings.
The survey noted tangible improvements in banking sector health:
- Overdue corporate loans declined from 18% of total outstanding in 2018 to 9% in 2024
- Banks' net non-performing asset ratios decreased by approximately one percentage point
- Faster resolution of stressed accounts and improved repayment discipline
International Recognition and Path Forward
Reflecting these systemic improvements, S&P Global Ratings upgraded India's insolvency framework to Group B in December 2025 from its previous Group C classification. The upgrade specifically cited higher recovery rates and quicker resolution timelines as key factors.
The Economic Survey's comprehensive analysis presents both the achievements and critical challenges facing India's insolvency resolution mechanism. While the IBC has undoubtedly strengthened credit culture and banking sector stability, the massive case backlog and MSME-specific shortcomings demand immediate policy attention and procedural reforms to realize the framework's full potential.
