Arbitration as an alternative

Today, NPAs are a menace in every bank and the delay in their recoveries is a matter of concern to the bankers and the regulators. Time and again, the fear of depositors losing money because of the stress on the bank’s financials keeps popping up forcing authorities to make statements to allay those fears.

The success of the Insolvency and Bankruptcy Code (IBC) in helping banks recover dues from large corporates cannot be denied. As per the Economic Survey 2020, the IBC has improved resolution processes in India compared to the earlier measures. The proceedings resulted in the recovery of 42.5% of the amount involved compared to 14.5% under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act. In terms of duration, the survey stated that the IBC proceedings take 340 days on an average as compared to the duration of 4.3 years in the SARFAESI case. While this reinforces the efficacy of the IBC as an effective tool for bad loan resolution, the banking industry needs a similar resolution mechanism for smaller borrowers like partnerships and individuals. The NPAs are high in this segment too and are expected to balloon due to covid stress. With more than a third of the customers skipping payment in the past few weeks, financial stress among middle and low-income retail borrowers is beginning to worry all. Is it then time for banks to look at the Alternative Redressal options, particularly arbitration, for a solution?

Alternative Dispute Resolution (ADR), encompassing Arbitration, Negotiation and Mediation, is a procedure for settling disputes without litigation. Right from ancient times, disputes have been referred to Arbitrators and Mediators for resolution, the Panchayat being one such forum. The ‘Panches’ were elected according to their wealth, social standing and influence in the community. Fear of ex-communication bound citizens to the authority of the Panches. One of the primary reasons for litigants preferring this option was that the process was unlike adversarial litigation, more collaborative and less time-consuming. Arbitration is a voluntary process driven by an agreement. It is a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators, who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court. In India, Arbitration is governed by ‘The Arbitration & Conciliation Act, 1996’ (As amended in 2015, 2019 & 2020).

Globally arbitration involving financial institutions is gaining grounds. In 2019, 32% of all arbitrations at the London Court of International Arbitration and 58% of the arbitrations at the American Arbitration Association involved financial institutions. Despite the codified process, so far, banks in India have had limited or no success as far as arbitration is concerned.

Why do banks hesitate to take this route?

Even though the grounds for challenge are limited, Awards by the arbitrators do get challenged in court, leading to delay and losses for banks. The legal challenges are usually on the procedure of arbitration. The bone of contention is the appointment of a sole arbitrator nominated by the Bank, which makes the borrower cry foul and raise the issue of bias of the arbitrator. These accusations lead to legal challenges for banks. This is a genuine concern. A person who has an interest in the outcome or decision of the disputes must not have the power to appoint a sole arbitrator. But given the benefits of quick and effective recovery, the parties must work around this issue and find a plausible solution. One way could be the appointment of an ‘Arbitration Tribunal’ with three members. While the Bank and customer would appoint their respective Arbitrators, these two Arbitrators would then appoint a ‘Presiding Arbitrator’. Banks may be sceptical about the cost, but it is money well spent, considering that the money recovered is available for further lending.

Arbitration can be an effective tool for recovery of dues in the smaller segments, but only if both parties have faith in the system. Considering that the government has been making strides towards establishing India as an arbitration-friendly jurisdiction, a little push will help create this trust. It can be a win-win situation for both the bank and the borrower – the banker can recover his money, and the borrower can return to his business quicker.

(The writer is a Professor and Chairperson, Banking and Financial Services, T A Pai Management Institute, Manipal)