When a 99.97% Haircut Tests the Soul of India’s Credit Culture

The Insolvency and Bankruptcy Code (IBC) was supposed to change the way India deals with business failure. For decades, insolvency in India was synonymous with delay, litigation and destruction of value. Businesses remained trapped in proceedings for years, creditors waited endlessly, and assets that might once have been productive gradually lost their worth.

The IBC sought to change that equation. Its promise was straightforward: speed, discipline and value maximisation. But recent personal insolvency proceeding involving businessman Subhash Chandra, however, raises an uncomfortable question—not necessarily about the principle of the IBC, but about the extraordinary outcomes that the system can sometimes produce.

The figures are stark:

• ₹22,006 crore — admitted claims.
• ₹6.25 crore — amount proposed to be paid under the personal resolution plan.
• ₹6.5 crore — including approximately ₹25 lakh towards insolvency-process costs.
• 0.03% — recovery against the ₹22,006 crore headline figure.
• 99.97% — implied haircut against that figure.

Numbers of this magnitude inevitably invite scrutiny. But the headline requires context.

A Personal Guarantor Case—Not a ₹22,000-Crore Bank Write-off

The first and most important qualification is that this is a personal insolvency proceeding involving a guarantor. The ₹22,006 crore figure should therefore not be described as money personally borrowed by Subhash Chandra, nor simply as ₹22,000 crore of bank loans being written off against one individual.

The underlying corporate borrowers remain liable for their obligations. Creditors may have recovery rights and remedies against those borrowers and their assets independently of the personal insolvency proceeding.

There is another important qualification. The creditor pool itself is much broader than conventional banks. The voting claims include private-sector banks such as HDFC Bank, Axis Bank, IndusInd Bank and RBL Bank, as well as public-sector banks such as Canara Bank and Union Bank. That is about 10.05% if all six are included. Some reporting puts the banks that voted against at 19.19%, but that figure includes LIC Housing Finance and IDBI Trusteeship/Franklin Templeton, which are not banks.

Indeed, the conventional banks constitute only a relatively small portion of the overall creditor pool. The large institutional and investment-related creditors account for a substantial majority. That distinction matters.

The headline “₹22,000 crore bank debt reduced to ₹6.5 crore” therefore gives an incomplete picture of what the case actually represents.

The NCLT Did Not Negotiate the Haircut

A second point is equally important. Under the IBC framework, the commercial decision regarding a resolution plan rests primarily with the creditors. The NCLT’s role is not to sit in place of the creditors and independently decide what percentage haircut would be commercially appropriate.

In this case, the resolution plan received approximately 80.81% approval by voting share. That fact changes the nature of the debate. The question is not simply: Why did the NCLT allow a 99.97% haircut?

The more fundamental question is: Why did the creditors holding the necessary voting majority conclude that this was the best recovery realistically available from the personal guarantor?

That is a legitimate question—not an indictment of the IBC. Indeed, asking it is essential if the insolvency framework is to retain public confidence.

A Large Haircut Is Not Automatically a Failure

It is important not to confuse a large haircut with a failed insolvency process. Insolvency is not about recovering every rupee originally claimed. It is about determining what can realistically be recovered from a distressed situation and doing so within a framework that maximises value.

Sometimes, accepting a substantial haircut can be economically rational. Assets may have little liquidation value. Enforcement may be uncertain. Litigation may take years. Assets may already be encumbered. The debtor’s personal capacity to pay may be extremely limited. And continuing to pursue an unrealistic claim may consume time and money without producing a better outcome.

Therefore, a large haircut by itself is not evidence of a defective insolvency system. But a haircut approaching 100% inevitably tests the credibility of that system.

When a creditor pool has claims of more than ₹22,000 crore while the proposed payment from the personal guarantor is only about ₹6.25 crore, the public is entitled to ask:

• What recoverable assets were actually available?
• What was the debtor’s demonstrated repayment capacity?
• What guarantees were enforceable?
• What assets had already been pledged or encumbered?
• What alternative recovery strategies were considered?
• What would litigation or enforcement have produced?
• What would liquidation or other recovery proceedings have yielded?
• And why was the proposed settlement commercially superior to those alternatives?

The answers do not necessarily have to produce a larger recovery. But the reasoning should be capable of being understood. Transparency around these questions would strengthen—not weaken—the IBC.

Look Beyond the ₹22,000-Crore Headline

There is another aspect of the case that deserves greater attention. The creditor composition reveals that this is not simply a story about public-sector banks losing enormous sums of money.

The conventional banks identified in the creditor pool account for roughly one-tenth of the voting claims, while the majority is represented by other financial and institutional creditors.

Among the largest individual claims are entities such as World Crest Advisors, Lemonade Capital Advisors, Corpcall Capital Advisors, Veena Investments and Catalyst Trusteeship-related interests.

This matters because the 80.81% approval cannot be understood merely as “the banks voted to accept a ₹6.5-crore settlement.”

The voting dynamics were shaped by the composition of the entire creditor pool. That makes it even more important to understand who the creditors were, what their respective claims represented, why some supported the plan and why several conventional lenders opposed it.

The composition of the creditor pool is not a peripheral detail. It is central to understanding how the resolution plan obtained the required majority.

The Bigger Question Lies Upstream

Yet there is an even more uncomfortable issue. The IBC operates after financial distress has occurred. It is a mechanism for dealing with the consequences of failure. But the accumulation of thousands of crores of financial exposure happened much earlier.

That is where the real story begins. 

• How did such substantial exposure accumulate? 
• Who assessed the risks? 
• What did the boards know? 
• What did the auditors report? 
• What did the rating agencies see? 
• What did lenders’ credit committees examine? 
• How were guarantees evaluated? 
• Were there concentration risks? 
• Were warning signs identified early enough? 
• And when those warning signs appeared, how quickly did lenders and other stakeholders act?

These questions may ultimately be more important than the size of the eventual haircut.

 Credit Discipline Begins Long Before Insolvency

A healthy financial system cannot depend upon insolvency law to clean up every problem after it has occurred. Credit discipline begins at the moment financing is sanctioned. 

• It depends upon prudent lending. 
• It depends upon transparent borrowing. 
• It depends upon boards capable of challenging management rather than merely endorsing it. 
• It depends upon independent and effective audits. 
• It depends upon rating agencies exercising genuine analytical judgement. 
• It depends upon lenders continuously monitoring exposure rather than treating sanction as the end of the credit process. 
• And it depends upon regulators identifying excessive concentration and emerging risks before they become large-scale failures.

The IBC can determine what happens after failure. The financial system must also answer what happened before failure. That distinction is crucial.

The Personal-Guarantee Question

The case also raises a broader question about personal guarantees. A personal guarantee is intended to provide creditors with an additional layer of protection when lending to a corporate entity.

But if a very large corporate exposure ultimately produces only a negligible recovery from the personal guarantor, the effectiveness of that additional layer deserves examination.

This does not necessarily mean that the guarantee was improperly invoked or that the insolvency process was flawed. Personal guarantees have to be assessed in the context of the guarantor’s actual assets, enforceability, competing claims and the law governing insolvency.

But it does raise an important question for lenders: How much economic value does a personal guarantee really provide if the guarantor’s recoverable personal assets are insignificant relative to the underlying corporate exposure?

That is a question that belongs in the credit-sanction process, not merely in the insolvency court years later.

The Real Test of the IBC

The success of the IBC should not be measured merely by how many insolvency cases are closed or how quickly proceedings move. Nor should it be measured simply by the size of haircuts. The larger test is whether the entire financial ecosystem learns from failure. 

Every major insolvency should leave behind more than a resolution plan. It should produce lessons for:

• lenders,
• borrowers,
• boards,
• auditors,
• rating agencies,
• trustees,
• investors,
• regulators, and
• policymakers.

Otherwise, there is a danger of creating a system that becomes increasingly efficient at resolving failures without becoming equally effective at preventing avoidable failures. That would be an incomplete reform.

Beyond the 99.97% Headline

The Subhash Chandra case should therefore not be reduced to a sensational headline about a 99.97% haircut. Nor should it be used, without qualification, as an argument against the IBC. The more constructive lesson is about credit culture and accountability in India.

A large haircut may sometimes be the economically rational outcome of a bad situation. But when the gap between the claim and the recovery is so extraordinary, society is entitled to ask whether the process that led to that outcome was transparent, commercially justified and properly scrutinised.

And perhaps the most important question lies even further back. Why did such a large financial exposure accumulate in the first place?

That is where responsibility must ultimately be examined—not only at the point of insolvency, but at the point of lending. A modern insolvency regime is essential. But insolvency is the last line of defence.

The first line is responsible credit. Between the sanctioning and accumulation of thousands of crores of exposure and the eventual recovery of a few crores from a personal guarantor lies a story that India’s financial system needs to understand.

The IBC tells us how we deal with failure. Credit discipline determines how much failure we allow to accumulate in the first place. That is the larger lesson.