Accelerating Financial Recovery: Leveraging ODR in the Banking Sector

The banking sector, as the lifeline of economic progress, faces the perennial challenge of navigating through disputes to ensure swift financial recovery. Recovery of outstanding loans and dues is crucial to growth of a country. For the financial year ended March, 2023, RBI confirmed that banks wrote off bad loans worth over INR 2.09 lakh crore (around $ 25.50 billion). Further, around INR 15.31 lakh crore ($187 billion) of loans have been written off since the financial year ended March, 2013.[1] Moreover, the recoveries in such loans has been an abysmal 18%.

In this light, the RBI Deputy Governor, Swaminathan J, emphasised on the need for banks and financial institutions to redouble their efforts to recover loans.[2] Keeping the same in mind, recently the RBI issued a notification increasing the risk weight of consumer credit and credit card loans extended by banks and nonbanking financial institutions. The same is intended to make such loans more expensive for consumers. Therefore, it is important to scrutinise the current modes of recovery employed by banks and other financial institutions.

Modes of recovery adopted in the banking sector

Traditional dispute resolution methods in the banking sector often involve cumbersome processes, extensive paperwork, and time-consuming legal procedures before different courts and tribunals. This can lead to delays in recovery and exacerbate financial losses as the same involves substantial expenditure of money and time for the purposes of recovery, which may reduce net recoveries for banks or non-banking financial institutions.

Online Dispute Resolution or ODR, with its digitalized approach to dispute resolution, presents a paradigm shift. It streamlines the resolution process. ODR processes can be leveraged to provide an open, unbiased, rule-based, system-driven, and user-friendly process with varying degrees of manual intervention. With around 5 crore cases pending before different courts, a matter before a court or a tribunal takes anywhere around a few years for completion. In fact, there are over 35 lakh cheque dishonour cases pending in courts across the country. Further, at the macro level, around Rs. 30,000 crore is incurred by litigants annually to attend the court hearing and Rs. 50,387 crore are lost by litigants annually due to loss of business.[3] ODR presents an opportunity for financial institutions to retain control over of the process and at the same time, complete the same within a few months. The real-time nature of ODR platforms enables parties to engage efficiently, transcending geographical barriers. In fact, as per the NITI Aayog Report on Online Dispute Resolution, ODR has the potential to add around Rs. 1,99,000 crore to India’s GDP due to savings made by litigants in court related expenditure, loss of business usually incurred due to attending court hearings etc. Recognising the utility of ODR, the RBI recommended adoption of the same for the purposes of resolution of grievances arising out of digital payments.

Effective Utilization of ODR in Accordance with RBI Guidelines:

ODR systems can be optimally utilised to ensure faster recovery. As a process, ODR is quite fluid to accommodate and adapt to the requirements of the particular sector. In this regard, ODR can ensure the following to conform to the guidelines in the financial sector:

1. Digital Transactions and Security: ODR can ensure robust security measures to protect sensitive financial data. Encryption protocols, secure authentication methods, and adherence to RBI’s cyber security guidelines can be maintained for ensuring the integrity and security of the dispute resolution process. The Reserve Bank’s Payment System Vision-2021 requires technology-driven, rule-based, customer-friendly, and transparent dispute redressal systems for payment system operators

2. Customer Protection and Fair Practices: ODR prioritizes transparency in the dispute resolution process. Providing clear communication and ensuring equitable solutions contribute to maintaining customer trust and upholding the principles outlined by the RBI for resolution in a fair and transparent manner. For eg: ICICI Bank adopted ODR to resolve 10,000 disputes with customers upto Rs. 20 Lakhs for faster and transparent resolution.

3. Innovation and Technological Integration: ODR represents a technological innovation in dispute resolution. Banks, must embrace this innovation by integrating ODR seamlessly into their operations. This involves training staff, adopting user-friendly platforms, and staying abreast of technological advancements that align with the RBI’s vision for a digitally driven financial sector. For example:- Legal Innovation Management and Briefing System (LIMBS)is a web-based application for monitoring cases involving the central government of India, in a more effective and transparent manner. It is an initiative of the Department of Legal Affairs (DoLA), Ministry of Law and Justice.

4. Customization for Banking: ODR solutions are customizable to meet the unique needs of the banking sector. Whether addressing consumer disputes, inter-bank conflicts, or regulatory issues, ODR platforms are adaptable to the specific requirements of financial institutions.

5. Enhanced Efficiency and Cost-Effectiveness: The economic burden of dispute resolution often turns the process itself into a punishment and thereby hinders access to justice. Apart from these tangible costs like legal advice, travelling long distances etc, there are other indirect costs, often faced by enterprises, on account of lengthy litigation proceedings. ODR contributes to enhanced efficiency and cost-effectiveness. By reducing the need for physical presence and paperwork, ODR minimizes administrative costs. This aligns with the RBI’s vision for a streamlined financial sector that utilizes technology to optimize resource allocation.

6. Continuous Monitoring and Compliance: ODR implement mechanisms for continuous monitoring to ensure adherence to both internal policies and RBI guidelines. Regular audits and assessments can further strengthen the credibility of ODR processes.

Conclusion

In conclusion, the effective utilization of ODR in the banking sector, guided by RBI directives, holds the key to faster recovery and a resilient financial ecosystem. By aligning ODR processes with the principles outlined by the RBI, banks and financial institutions can navigate disputes efficiently, reduce recovery time, and bolster customer trust. The synergy between technological innovation and regulatory wisdom creates a harmonious framework for dispute resolution, paving the way for a future where financial recovery is not only swift but also aligned with the evolving landscape of digital finance. As the banking sector continues to evolve, the integration of ODR in accordance with RBI guidelines emerges as a strategic imperative, fostering a robust and adaptive financial environment.

References: 

[1] Banks Wrote off Bad Loans Worth Over Rs 2 tn in FY23; Rs 10.57 tn Written off in Last 5 Years: RBI, The Wire, 24 July 2023. Available at https://thewire.in/banking/bad-loans-npas-written-off-rbi.

[2] RBI MPC: Deputy governor asks banks to ‘redouble’ efforts on loan recovery, Moneycontrol, August 20, 2023. Available at: https://www.moneycontrol.com/news/business/rbi-mpc-deputy-governor-asks-banks-to-redouble-efforts-on-loan-recovery-11142791.html.

[3] Access to Justice Survey, 2015-16, Daksh. Available at: https://dakshindia.org/wp-content/uploads/2016/05/Daksh-access-to-justice-survey.pdf