5 Mistakes Indian Banks and NBFCs Make that Lead to Overpaying for Arbitration Claims

Although financial institutions usually prefer instituting proceedings under SARFAESI Act or the Insolvency & Bankruptcy Code, in many cases they are left with no option but to pursue arbitration.

Arbitration has become the default dispute resolution mechanism for Indian banks and NBFCs, particularly in loan recovery, restructuring disputes, consortium lending, g

uarantee enforcement, and fintech partnerships. However, despite the Arbitration and Conciliation Act, 1996 being designed to promote speed and cost efficiency, financial institutions frequently overpay in arbitration through mounting legal costs and arbitrator’s fees. These are often the result of avoidable procedural and strategic errors.

1) Failure to Opt for Fast-Track Arbitration Under Section 29B

A recurring and costly mistake made by Indian banks and NBFCs is the failure to provide for fast-track arbitration under Section 29B of the Arbitration and Conciliation Act, 1996. A large category of financial disputes, such as loan recovery actions, enforcement of guarantees, and claims based on admitted account statements, are largely document-driven, with limited scope for factual dispute.

These disputes are ideally suited for the fast-track procedure, which permits the arbitral tribunal to decide the matter on the basis of written pleadings, documents, and limited oral hearings.

Despite this, financial institutions routinely proceed with full-fledged arbitral trials involving extensive oral evidence and prolonged hearings. This leads to higher legal costs, delayed awards, and continued accrual of interest and costs against the institution. Section 29B also allows parties to agree to a simplified procedure at any stage of the arbitration, yet banks and NBFCs seldom exercise this option even when the dispute clearly warrants it.

The failure to standardize arbitration clauses to include Section 29B fast-track procedures, or to strategically shift to fast-track arbitration after pleadings, results in avoidable financial leakage. For institutions managing high volumes of similar disputes, not using Section 29B is a systemic inefficiency with real financial consequences.

2) Over-Reliance on Ad Hoc Arbitration Instead of Institutional Arbitration

Despite the scale and volume of disputes handled by financial institutions, arbitration clauses continue to rely on ad hoc arbitration. This frequently leads to delays in constitution of tribunals, inconsistent fee demands, and procedural indiscipline. Institutional arbitration offer structured rules, fee schedules aligned with the Fourth Schedule of the Act, and administrative oversight. For banks and NBFCs, the absence of institutional arbitration often translates into cost overruns and weak procedural control.

3) Not Institutionalizing Virtual and Hybrid Arbitration

Post the 2019 and 2021 amendments and judicial recognition of technology-driven proceedings, virtual hearings are no longer exceptional. Yet many banking arbitrations continue to default to physical hearings. This leads to higher costs, repeated adjournments, and logistical delays, particularly where borrowers or guarantors are located across jurisdictions. Failure to mandate video conferencing (VC) arbitration in agreements or procedural orders undermines efficiency and increases operational and legal expenditure.

4) Weak Evidence Management

A critical yet overlooked reason for overpayment is poor evidence preparation. Banks and NBFCs frequently rely on account statements, digital records, and system-generated documents without ensuring compliance with laws of evidence. Defective certification, inconsistent account extracts, or improper proof of disbursement and default weaken claims and expose institutions to adverse findings, reduced awards, or higher costs. Solid evidence management, aligned with RBI norms and evidentiary requirements, is essential to avoid financial leakage in arbitration.

5) Treating Arbitration as Conventional Civil Litigation

Many financial institutions continue to approach arbitration as an extension of civil litigation. They file excessive pleadings, raise unnecessary interlocutory applications, and lead redundant evidence. This approach defeats the legislative intent of minimal judicial intervention under Sections 5 and 19 of the Act. A commercially focused arbitration strategy, with limited witnesses, precise issues, and targeted submissions, can substantially reduce costs and exposure.

Conclusion

For Indian banks and NBFCs, arbitration efficiency is not just a legal concern; it is a balance-sheet issue. Failure to use statutory timelines, institutional mechanisms, technology, evidentiary discipline, and arbitration-specific strategy often leads to avoidable overpayment. In an increasingly regulated and margin-sensitive environment, getting arbitration right is no longer optional; it is essential financial governance.

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Vikrant D. Shetty | Vikrant D. Shetty leads the Arbitration and Banking Law Practice at Vikrant D. Shetty & Associates, Advocates & Solicitors. Mumbai is India's financial capital and the base for a large share of the country's banking, NBFC, and alternative lending activity. The firm advises banks and financial institutions on debt recovery strategy including arbitration, SARFAESI enforcement, DRT proceedings, and enforcement of arbitral awards, as well as on arbitration clause drafting, interim relief, and conduct of proceedings.

Related reading: IBC vs SARFAESI: Which Route Delivers Faster Asset Realisation.

This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified advocate.