Mediation in Banking Sector - From testing waters to taking the plunge

Banking Sector and Mediation

The health of financial condition of the country is best mirrored in the financial statements of the banking sector. Banks perform a major role in mobilising savings of the people and generate capital for industry that in turn produces wealth in real terms. If the amounts borrowed from banks to create capital are not being repaid because the production does not keep pace with the capital infused, the non- performing assets that the banks pile up constitute a major drag in the economy. According to RBI data, an aggregate amount of Rs 3,98,6711 crores was written off by banks over the last four financial years.

The mechanisms for recoveries by establishing Debt Recovery Tribunals (DRTs) and the setting up of National Company Law Tribunals (NCLTs) with the respective appellate tribunals have contributed significantly to quicker recoveries with the bad loans of public sector banks (PSBs) reported to be declining by over Rs 23,000 crore from a peak of Rs 9.62 lakh crore in March 2018. On governance reform in the banking sector, the Governor of RBI said that it was an important issue and the RBI has initiated consultation with various stakeholders as to what kind of reforms could be brought in.

Liquidating assets through distress sales may see money trickling in to the lender banks but if enough attention is not given to make course corrections that help industry to stay alive  than fold up, we will end up adding up to national losses the cost of setting up these tribunals also. Adjudicatory bodies do not ever look to reasons why borrowers fail. Their jobs consist of identifying the amounts due and setting timelines for recoveries by voluntary payments and in default bring up properties for sales. Between the time the proceedings start to finish, considerable time is lost, business flounders for lack of correctives more particularly for want of fresh infusion of funds and there is all round economic doom.

If the Reserve Bank sets about the task of administering reforms, all the institutions must turn to ADR formulations as the most viable course to adopt. The watchword to meaningful dialogue it to help parties trust in each other and identify the underlying interest that will give place to evolving strategies for repayments and continue viable units to prosper and poor ideas in businesses to fold up.Worldwide experience has been that 90% of the claims are related to issues with loans, while the other 10% were about misunderstandings regarding bank deposits, current accounts, bank transfers or leasing. The trend towards ADR processes in banking and finance has been motivated by several factors including the internationalisation of banking and finance transactions, the increased complexity of disputes, the lack of consistency in court decisions, a demand for more flexibility and party autonomy, and privacy and confidentiality considerations. Legal instruments peculiar to the financial services sector include Loans Agreements, Mortgages, Debentures, Equipment Leasing Agreements, Cheque Purchase Agreement, Insurance Policies, Advance Payment and Performance Bonds.These documents could contain multi-tiered dispute resolution clauses. That is from negotiation, to mediation or conciliation and arbitration. Even in the absence of such clauses, there is no prohibition against resorting to any of them. The Commercial Courts Act, the Companies Act, the Consumer Protection Act and MSME Acts have all provisions for mediation only because the Parliament recognises what the industry needs, - an efficacious process of dispute resolution.

The Legal Service Authority of India has engaged in capacity building exercise in establishing ADR centres in every district in the country and subjecting them to over all control from Delhi through NALSA. It has constantly organised camps and workshops to train local lawyers from taluk centres upwards to its central body through lawyers practising in Supreme Court. There is adequate space for competent, well-trained professionals with exposures to international commercial disputes. The law is almost comprehensive, all except a standalone legislation on mediation. Only big institutions like Banks could lead the way and establish confidence building approaches by resorting to ADR processes instead of engaging in time consuming conventional court/ tribunal litigation. Now is the time for banking sector as the major disruptor in leading the change from slow moving court litigation approaches to quick, enduring, result oriented mediation initiatives.

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