Does Greater Creditor Protection Affect Firm Borrowings? Evidence from IBC

Abstract

The Insolvency and Bankruptcy Code (IBC) in India ushered in a new era of creditor-in-control regime with an in-built mechanism for time-bound resolution. This article examines the impact of the Code on firm borrowings and cost of funds. Using firm-level data on 4,531 firms for the period 2012–2018, we find that implementation of IBC has had many desirable consequences from a policy perspective. It helped in deleveraging of firms as their reliance on borrowings—whether long-term or short-term—declined. Further analysis suggests that this is especially true for weak and large firms. The stronger creditor protection is, thus, a step in the direction of reducing the burden on banks and further market deepening. JEL Classification: G32, G33, G38, D22, O16