Page 250 - India Insurance Report 2023- BIMTECH

238 India Insurance Report - Series II

The efficiency of the bankruptcy system can be measured by three specific indicators: the time to go
4
3
through the insolvency process , the cost of insolvency and the recovery rate . In many developing
2
countries bankruptcy is so inefficient that creditors hardly ever use it. How much of the insolvency
estate is recovered by stakeholders, taking into account the time, cost, depreciation of assets and the
outcome of the insolvency proceeding? 5

Every credit decision requires a specific type of information and generally speaking, the more
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specialized the data source, the more predictive it will be. Availability and quality of credit information
is next factor, which companies might be affected by credit risks.

Consequently, businesses have to devote resources to managing credit relationships and the resultant
credit risk. Effective credit risk management becomes an essential tool to succeed in business.
Unfortunately, credit management is often neglected by small and medium-sized enterprises (SMEs),
which typically lack the administrative resources to assess buyers’ risks, tailor credit terms to reflect
these risks and monitor payments in order to reduce cash collection periods and minimise the occurrence
of payment default. In comparison to smaller companies, large firms dedicate vast resources to credit
management, which, together with their bargaining power, grants them important competitive advantages. 7

2 Time is recorded in calendar years. Information is collected on the sequence of procedures and on
whether any procedures can be carried out simultaneously. Potential delay tactics by the parties, such as
the filing of dilatory appeals or requests for extension, are taken into consideration.

3 The cost of the proceedings is recorded as a percentage of the estate’s value. The cost is calculated on
the basis of survey responses by insolvency practitioners and includes court fees as well as fees of insolvency
practitioners, independent assessors, lawyers and accountants.

4 The recovery rate is recorded as cents on the dollar recouped by creditors through the bankruptcy or
insolvency proceedings. The calculation takes into account whether the business emerges from the
proceedings as a going concern as well as costs and the loss in value due to the time spent closing down.
If the business keeps operating, no value is lost on the initial claim, set at 100 cents on the dollar. If it
does not, the initial 100 cents on the dollar are reduced to 70 cents on the dollar. Then the official costs
of the insolvency procedure are deducted (1 cent for each percentage of the initial value). Finally, the
value lost as a result of the time the money remains tied up in insolvency proceedings is taken into
account, including the loss of value due to depreciation of the hotel furniture. The recovery rate is the
present value of the remaining proceeds, based on lending rates from the International Monetary Fund’s
International Financial Statistics, supplemented with data from central banks.

5 Doing Business 2009. Europe & Central Asia, p. 29-31.

6 A. Coté, The Wright Credit Report: Using the Best Data Sources for Your Company, “Business Credit”,
March 2006.
7 A. S. J. Riestra, Credit insurance in Europe. Impact, Measurement and Policy Recommendations,
CEPS Research Report in Finance and Banking No. 31, February 2003, p. i.