Whalesbook
Why Lenders Aren't Using Arbitration's Power
India's banks and non-banking finance companies (NBFCs) are largely failing to use a powerful legal tool: arbitration. Section 17 of the Arbitration and Conciliation Act, 1996, allows arbitration tribunals to issue interim orders, similar to court orders, to preserve assets and help recover money quickly. However, these powers are rarely used, leaving financial institutions vulnerable when borrowers default and unable to protect their assets effectively.
Reasons for Hesitation
Several factors explain why lenders aren't using these arbitration powers. A major hurdle is uncertainty over whether these interim orders can be fully enforced, especially against third parties like banks that hold borrower accounts. Lenders' compliance and risk departments also lack clear guidance on how these orders fit with regulations, including those from the Reserve Bank of India (RBI). Although a 2015 legal update gave arbitration tribunals power similar to courts for interim measures, lenders are hesitant to adopt them due to perceived complexity in their daily operations. This reluctance stands in contrast to the increasing global acceptance of arbitration for resolving financial disputes.
Sama Aims to Bridge the Gap
To help close this gap, Sama, a leading Online Dispute Resolution (ODR) platform, is organizing a special roundtable. The event, titled "Interim Reliefs in Lending: From Legal Validity to Institutional Adoption," will take place in Mumbai on May 5, 2026. It will bring together senior leaders from banks, NBFCs, legal professionals, and dispute resolution experts. The goal is to clarify how to enforce Section 17 orders, explain their impact on third parties, and discuss practical implementation. Better use of these powers could greatly help financial institutions secure assets, freeze accounts, recover debts faster, reduce credit risk, and boost financial stability.
The Legal Framework and Its Evolution
The legal power of arbitration tribunals has grown significantly. Before a 2015 amendment, Section 17 powers were weaker than court powers under Section 9. The 2015 Act aimed to make them equal, giving tribunals broad authority for actions like preserving assets or issuing interim injunctions. India is actively promoting alternative dispute resolution (ADR) and arbitration to become a global center for such services. ODR platforms, like Sama, which handle millions of cases quickly, show a clear move towards faster and cheaper ways to resolve disputes compared to lengthy court cases. While Indian courts generally support arbitration, specific issues with Section 17, especially regarding third-party orders where courts under Section 9 have more scope, need clearer understanding and support from institutions and regulators. The proposed Arbitration and Conciliation (Amendment) Bill 2024 also shows the government's intention to boost arbitration and ODR use by financial institutions.
Risks of Not Using These Powers
By not using Section 17 powers, financial institutions face significant dangers. A major risk is increased credit risk, as delays in securing assets or freezing accounts through arbitration can result in permanent losses if borrowers default. This inaction also puts them at a disadvantage compared to faster competitors who do use ADR. Moreover, keeping up with changing regulations, like those from the RBI, becomes harder without adopting strong legal dispute resolution tools. Lingering doubts about how arbitration orders apply to third parties can prolong legal fights, defeating the purpose of arbitration. Lenders' continued reliance on slow court processes, even with their known inefficiencies, keeps this gap open.
Moving Forward
The upcoming roundtable by Sama is a key moment. If the event successfully clears up legal uncertainties and operational issues, it could encourage more widespread use of Section 17 powers. This would bring Indian financial institutions in line with global trends in ADR and ODR. Such a shift could lead to faster debt recovery, lower legal expenses, and better stability for the financial sector. Clear guidance from regulators like the RBI on how to integrate these arbitration powers would further support this change, promoting a more proactive approach to resolving disputes.