The Resolution Risk Premium: An Analysis of the Pre- Packaged Insolvency Resolution Process (PPIRP) Framework’s Impact on an MSME’s Access to Affordable Credit

Abstract

The Pre-Packaged Insolvency Regime in India was developed for MSMEs to provide a speedier, less disruptive, and cost-effective alternative to formal insolvency, with the implicit intent of reducing the “resolution risk premium” inherent in MSME lending. However, due to the structural and procedural flaws inherent in the PPIRP framework, this implicit cost of credit has persisted whereas, in some cases, it has increased aslo. The hybrid model, in which debtors retain operating control but lose decision-
making powers, generates agency risks, moral hazard, and monitoring inefficiencies that erode confidence among lenders. Moreover, the legislatively guaranteed 120-day resolution timeline has proved illusory due to judicial delays, objections raised at the pre-admission stage, and inconsistent interpretations by various tribunals. This has enhanced timeline risk, which is one of the key components of the resolution risk premium. Simultaneously, the recovery risk remains high due to the negotiations-based approach toward base resolution plans, the legally binding prioritization of operational creditors, and the apprehensions relating to accountability that financial institutions face when approving haircuts. Ultimately, these systemic weaknesses discourage creditor participation and hinder the objective of affordable credit flow into the MSME sector, which accounts for nearly one-third
of India's GDP and is the anchor for employment generation. Restoring predictability and efficiency, thereby reducing the embedded risk premium and strengthening MSME credit markets and contributing to broader financial and economic stability, calls for a calibrated recasting of statutory timelines, judicial intervention thresholds, and creditor protection mechanisms.