Recovery rate for operational creditors stands at mere 24%: Study
The average recovery rate for financial creditors in corporate insolvency cases which ended in resolution is about 38.5%, while those for operational creditors is 23.8%, according to an analysis by two professors of IIM Ahmedabad. The results were based on the recovery rate analysis is 542 firms.
For financial creditors, the highest recovery rates were observed in the hotels and restaurants and construction industry and the lowest in cases related to electricity, gas and water supply firms. For operational creditors, the highest recovery rate was observed in the wholesale & retail trade and hotels and restaurants industry, while the lowest recovery was observed in transport, storage and communications industry.
One other service-based industry – Health and Social Work – also showed high recovery rates.
Interestingly, the highest recovery rates are not for asset-heavy industries but rather for asset-light industries with substantial intangible assets. It also highlights the importance of an auction to realize the going concern value of an entity.
“This challenges the traditional notion of asset-heavy industries having higher recovery rates. The role of auctioning might also have been crucial for price discovery for the service industry,” says the IIMA study.
An analysis of the expenses incurred during the resolution process shows that while the recovery rates of firms in the Other, Social and Personal Service activities industry are low (23.8% compared to overall average of 33.18%), the expense ratio is the highest when we consider both the median and the average (15.8% of the realizable amount compared to overall average of 9.2%).
It is likely that the nature and complexity of the business would entail incurring a higher cost during the resolution process. The findings also indicate that the expense incurred rises non-linearly to the delays in resolution. Hence, a time-bound resolution process can reduce inefficiencies and provide a higher realization of claims for creditors.
Also Read: 76% increase in sales of resolved firms in 3 yrs since resolution
