By Mayank Khera
India’s steadily growing economy continues to remain a bright spot amidst the widespread uncertainty and economic volatility that other countries are facing. India is well on its way to become the world’s third-largest economy by 2030. The booming and robust financial services sector has been a key catalyst in driving India’s economic growth. Banks and other non-banking financial services companies have catered adequately to the needs of retail customers as well as businesses over the years through advancement of credit, cash flow management, and other services.
Studies show that during 2008-2014, India witnessed a high credit growth of 16.8%. However, from 2014-2021, the credit growth slowed down to 8.3%. One of the reasons for this deceleration was the burdening of financial institutions with non-performing assets (NPAs). The NPAs were owing to the economic slowdown, over lending in certain sectors, non-traceability of borrowers, lack of data access to assess correct creditworthiness and upsurge in lending of unsecured debt. Therefore, timely recovery of debt and regularising the NPAs is critical for maintaining a profitable balance-sheet and avoiding liquidity crisis that may result in the failure of financial institutions.
From the borrower’s perspective, many who take loans are unable to repay it and have to either face the lender’s recovery cycles or be stuck in the ever-burdened system of litigation. This is where mediation can come as a big relief for these debtors. It is said that “An ounce of mediation is worth a pound of Arbitration and a ton of litigation” and this quote truly describes the essence of mediation as a process in terms of debt recovery.
To put simply, Mediation is a non-adversarial alternative dispute resolution process in which the concerned parties involve a neutral mediator to reach an amicable agreement by creating a conducive environment for the parties to discuss, understand and explore various resolution options available to them.
Through mediation, both the financial institution and borrower may get benefits such as cost-effectiveness, speedy resolution, and a win-win outcome for them.
Litigation is time consuming, expensive and leaves parties with little to no control over the outcomes. The courts have recognized this aspect and have increasingly promoted alternative dispute resolution systems between the parties.
The erstwhile Chief justice of India, NV Ramana, in his article, emphasized the importance of mediation and predicted its growth in the future as it is a quick, cost-effective, and convenient resolution method. The Supreme Court in its various judgments also held that alternative dispute resolution mechanisms can be relied upon by the parties to resolve disputes arising from business and commercial contracts.
Mediation is a voluntary process, meaning that participation requires the agreement of both the parties—the borrower and the financial institution. The statements made before the mediators are neither binding nor detrimental to the locus of the said parties.
This voluntary aspect endows the parties to actively engage in the resolution process. In the process, the neutral party or the mediator facilitates a meaningful one-on-one conversation between financially overburdened borrowers and the financial institutions.
It lowers the stress of borrowers and helps them with a manageable debt payment schedule while helping the financial institution with the inflow of the outstanding amount.
Unlike the litigation process, since mediation is not dependent on presenting evidence, it results in a friendly and flexible approach helping the parties focus more on finding solutions than following legal formalities.
In the case of Chanda Engineers (India) Ltd vs. U.C.O Bank, the Calcutta High Court held that the mediation process doesn’t have to adhere to a strict procedure, but must respect the principles of natural justice.
Mediation also prevents aggression between the parties, allowing the mediator to connect them with each other, remove any misunderstandings, and maintain future relations. It is mutually beneficial for the debtors and creditors.
As it is a one-on-one process, it is confidential and voluntary as compared to trials conducted in open courts where information presented is accessible to the public.
Further, in mediation, when there is a gap or obstacle in the process of reaching an agreement, and no offers seem to be agreed upon by the parties, the mediator will try to show the reality to them that their case may not be strong as they think and going for litigation may become expensive for the parties.
The mediator may advise the parties to trade off the less critical thing with more essential things and open the frame of options by brainstorming, thereby resulting in an efficient and effective conclusion of the matter.
With the ever-increasing demand for credit and the law regarding recovery of debt in India still being an assortment of multiple laws, there is a probability of legal proceedings being initiated in multiple already overburdened forums.
This results in unnecessary persecution of the parties instead of resolving the NPAs. In such a situation, where both lending and recovery are sensitive and challenging areas, Mediation can act as a boon for efficiently recovering the debt in the most practical manner.
It is, therefore, high time for both the financial institutions and the borrowers to welcome and explore it with open arms.
—Mayank Khera is the Co-Founder and COO of Credgenics.