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To resolve disputes and recover funds from loan defaults, bankers must choose paths other than litigation, writes ICICI Bank General Counsel Nilanjan Sinha.

The Indian judicial system has been overwhelmed with a backlog of pending cases, many of which are drawn out. Given the breadth of the banking and finance industry, a sizeable portion of pending litigation involves financial entities that can play a significant role in providing feasible solutions and adopting organisational approaches which encourage the reduction of litigation.

Litigation concerning banks largely emanates from loan recovery processes and consumer disputes. Banks are among the top five categories of entities facing complaints in consumer courts. Per the National Consumer Disputes Redressal Commission, banking-related cases make up around 10-15% of all cases in consumer courts at various levels. These include disputes over loan terms, credit card charges, unauthorised transactions and service deficiencies.

There is also an increasing trend for filing writ petitions against private banks or for banking-related issues. As of 12 September 2024, more than 1.6 million writ petitions were pending before various high courts, of which banking or finance-related matters constitute a sizeable portion.

These writs are instituted by customers against banks for various reasons including issues related to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act action and compliance with law enforcement notices.

As of January 2024, there were about 215,000 cases pending before debt recovery tribunals (DRTs). Of these, 162,000 were original applications filed under the Recovery of Debts and Bankruptcy Act, 1993, and more than 85% of the cases had been pending for longer than six months.

In the case of a default, the go-to option for a banker is to file a suit for recovery. However, statistics and common sense suggest that a cost benefit analysis and recoverability assessment should be done before deciding to file such a suit.

The author believes that we should work towards resolving disputes through greater empathy and understanding. If one analyses the capital of the banking industry and the resources of the country spent on resolving such disputes, it often makes both commercial and common sense to resolve them outside the court.

Resolving disputes outside the court system involves making some decisions. Banks must have a framework for assessing these decisions and regulators/law enforcement agencies should encourage such practices.

Bankers should be allowed elbow room to make calls in the interest of accelerated resolution of disputes, and encouraged to take these decisions by applying their judgement. With today’s openness to information including credit ratings, a defaulting borrower would find it very difficult to obtain loans at reasonable rates from another lender.

To provide impetus to the resolution of stressed assets in the banking system, the Reserve Bank of India (RBI) introduced a Framework for Compromise Settlements, which inter alia allows regulated entities to undertake settlements with the borrower within a board-approved policy and lays down the broad principles to be followed. Similarly, the RBI’s Prudential Framework for Resolution of Stressed Assets identifies incipient stress and implements a resolution.

Opting for ODRs

Appreciating that filing recovery suits in civil courts/tribunals may not be the only way to resolve disputes. ICICI Bank, for example, adopted an online dispute resolution (ODR) mechanism few years ago – as an industry first initiative – to resolve low value customer disputes.

An ODR is a cost-effective and trusted mechanism of alternative dispute resolution to redress large numbers of disputes. It is a digital approach to resolve disputes efficiently, often without the need for physical meetings. It involves filing a complaint online, selecting a neutral mediator or arbitrator, exchanging evidence digitally, and conducting virtual hearings, reducing the reliance on paper. ODR platforms have addressed fairness concerns by offering encrypted solutions and ensuring compliance with legal safeguards.

The ODR has democratised the delivery of fair justice for the masses, providing an unbiased platform to resolve grievance by conversation. This extols the ICICI Bank’s philosophy of being “Fair to Customer and Fair to Bank”. It provides balanced treatment of customers with inherent principals of transparency, accessibility and convenience.

Since its adoption three years ago, ICICI Bank has been able to resolve about 50,000 low-ticket retail loan default cases. Even the Securities and Exchange Board of India has recently launched a common ODR portal, which harnesses online conciliation and arbitration for resolving disputes among market participants and investors.

Learning from the success of ODRs can open up further opportunities to resolve disputes outside courts. Smart mediation and ODRs can be extended to resolving customer complaints by coupling them with a pre-dispute trigger model to predict probable complaints. Similarly, banks should explore the settlement of cases through negotiation, within a framework, to mitigate risk of bias. Modern tools like AI could be adopted to provide guidance in decision making.

Mandatory pre-institution mediation (as is enshrined in section 12A of the Commercial Courts Act, 2015) should be explored in increased breadth for various matters. Development of a strong mediation and alternate dispute resolution framework would greatly reduce the burden on courts. Courts should actively encourage mediation and not entertain suits that are non-compliant.