Timing matters: Creditor incentives and delayed admission under India's IBC

This paper examines how different classes of creditors use India's Insolvency and Bankruptcy Code (IBC), with a focus on the timing of insolvency initiation. Using a novel dataset that combines firm-level IBC admission records with financial data, we compare the characteristics of firms referred to IBC by financial creditors (primarily banks) and operational creditors. We find a systematic divergence. Firms brought to the IBC by financial creditors are significantly more stressed and highly leveraged-not only at the point of admission, but for several years prior. In contrast, firms referred by operational creditors are relatively less distressed and do not exhibit the same degree of pre-admission deterioration. These patterns persist across time and across bank types, and become more pronounced in the post-Covid period. This divergence points to a misalignment in creditor incentives, with important implications for the effectiveness of the IBC. More broadly, the results highlight that the success of a time-bound insolvency regime depends not only on resolution outcomes, but critically on the timing of entry into the process.