Skip to main content

The case for mediated settlements (.hindu )

To reduce NPAs, creditors and debtors need sufficient immunity to hammer out sound commercial solutions

The country’s banking sector is severely stressed with one-sixth of the gross advances of public sector banks (around ₹7 lakh crore) being non-performing assets (NPAs). Existing statutory remedies of insolvency, restructuring of companies, securitisation of debts yield much litigation but insufficient recoveries. The Reserve Bank of India (RBI) brought out a Corporate Debt Restructuring scheme for resolution of dues from the larger companies which account for 70% of the debt portfolio; despite it being a well-structured system, it has failed to deliver substantially. It, however, omitted from attention the smaller borrower with loans less than ₹10 crore.

Now attention is focussed on the concept of a “bad bank”, which would purchase the large loans from the holding banks. The latter would then have better-looking balance sheets; however, the former will find recovery no less difficult. It would then sell off assets to private buyers, who see opportunities for profit-making rather than investment in the economic productive sense.

Roadblocks to settlement

Two core aspects appear to be the major roadblocks. The first is the limiting aspect of direct negotiations between bank and debtor, which usually run on the lines of high demands by banks and low offers by the debtor. The smaller borrower especially is faced with an imbalance in negotiating strength and is thus denied feasible, even if unattractive, settlement terms. Larger borrowers in acute distress may face similar problems. Settlement terms can be onerous which, if breached, have consequences of closure of business and sale of property. A mediation approach, where an independent neutral engages with both parties, is more likely, practically and empirically, to lead to faster and better agreements. In joint and separate sittings with the mediators, this consensual, non-coercive and confidential process enables the parties to discuss options such as debt concessions, repayment schedules, interest reductions, perhaps even additional credit with safeguards.

In face-to-face meetings between only creditor and debtor, the fuller gamut of settlement opportunities are not explored, because this would involve more information being exchanged or conditional concessions being made which borrowers fear will be seized upon by bank officers for enhancing demands and hard bargaining. Mediation reverses this; the process is designed to freely create, explore and refine options to yield a solution both amicable and sustainable. Moreover, in their separate meetings with parties, mediators can bring home to them the problems with their case should it proceed to litigation, the lack of worthwhile alternatives to reaching an agreement at the table, and also persuade them to take more reasonable and practical stands.

Mediation is now well accepted in India, both legislatively and through extensive use by the courts. Agreements reached through this process are enforceable without difficulty. If the RBI sets up mediation panels consisting of bankers, accountants and experienced mediators, that will provide the required institutional framework and enhance trust and credibility in the process and personnel.

Freedom from fear

The other major block, which paralyses decision-making in government and public sectors in India, is the fear of post-decisional retributive action by way of investigation and prosecution by multiple agencies such as the police, the Central Bureau of Investigation (CBI), the Central Vigilance Commission (CVC), the Lokpal, etc. Once initiated, the spectre of lengthy criminal trials looms, accompanied by fear of arrest, denial of bail and public ignominy. Courts respond inadequately — they do not speed up trials or consider bail applications expeditiously or penalise unnecessary prosecution. This inhibits settlements which are in the best interests of the bank but involve some concession or latitude inevitable in reaching the best compromise.

Freedom to take sound commercial decisions must be statutorily structured, else all our schemes will come to naught. One way is to create a high-level body before which settlement agreements can be placed for approval. This body will examine the settlement to see if it is commercially advantageous and is in the interests of the public sector financial institutions, taking all prevailing circumstances into account. Where it comes to an affirmative conclusion, that should provide complete immunity — from the police, the CBI, the CVC, the Lokpal and the courts — for the officers of the bank who have negotiated and recommended such solution. This is a better step than oversight committees which do not provide the backbone to take the commercial decision of beneficial compromise.

Such a body needs to be headed with high authority, drawn from the top echelons of the judiciary, the RBI and public sector banks, serving or retired. It should be a multi-tier body when the number of cases increases, which will happen because once you offer mediated solutions with protection for sound decision-taking, then both banks and borrowers will know that it makes eminent sense to try this approach which essentially means no risk in trying for a settlement, and no risk in agreeing to it.

Popular posts from this blog

Cloud seeding

Demonstrating the function of the flare rack that carries silver iodide for cloud-seeding through an aircraft. 
Water is essential for life on the earth. Precipitation from the skies is the only source for it. India and the rest of Asia are dependent on the monsoons for rains. While the South West Monsoon is the main source for India as a whole, Tamil Nadu and coastal areas of South Andhra Pradesh get the benefit of the North East Monsoon, which is just a less dependable beat on the reversal of the South West Monsoon winds.

SC asks Centre to strike a balance on Rohingya issue (.hindu)

Supreme Court orally indicates that the government should not deport Rohingya “now” as the Centre prevails over it to not record any such views in its formal order, citing “international ramifications”.

The Supreme Court on Friday came close to ordering the government not to deport the Rohingya.

It finally settled on merely observing that a balance should be struck between humanitarian concern for the community and the country's national security and economic interests.

The court was hearing a bunch of petitions, one filed by persons within the Rohingya community, against a proposed move to deport over 40,000 Rohingya refugees. A three-judge Bench, led by Chief Justice of India Dipak Misra, began by orally indicating that the government should not deport Rohingya “now”, but the government prevailed on the court to not pass any formal order, citing “international ramifications”. With this, the status quo continues even though the court gave the community liberty to approach it in …

Indian Polity Elections (MCQ )

1. Who of the following has the responsibility of the registration of voters
a) Individual voters
b) Government
c) Election commission
d) Corporations


2. Democracy exists in India, without peoples participation and co operation democracy will fail. This implies that
a) Government should compel people to participate and cooperate with it
b) People from the government
c) People should participate and cooperate with the government
d) India should opt for the presidential system


3. Which of the following are not the functions of the election commission
1) Conduct of election for the post of the speaker and the deputy speaker, Lok sabha and the deputy chairman, Rajya sabha
2) Conduct of elections to the state legislative assemblies
3) Deciding on all doubts and disputes arising out of elections

a) 1 and 2
b) 1 and 3
c) 2 and 3
d) 2

4. Which of the following electoral systems have not been adopted for various elections in India
1) System of direct elections on the basis of adult suffrage
2…