While aggressive strategies and legal issues have made DRAs less effective, a possible substitute known as Litigation Financing or Third-Party Funding (TPF) has developed.
Debt collection presents a significant difficulty for banks and other financial organizations in the complex world of financial services. Litigation financing and debt recovery agents (DRAs) are the two main methods that have surfaced. While aggressive strategies and legal issues have made DRAs less effective, a possible substitute known as Litigation Financing or Third-Party Funding (TPF) has developed. TPF entails the funding of litigation expenses by third parties in exchange for a portion of the winnings in successful cases. TPF is given a boost by the DRA’s lack of regulations because it enables claimants to seek justice and investigate their own claims even when they have minimal financial resources.
Debt recovery agents: What are they?
Debt recovery agents are considered to be typical ways for financial institutions to recover their bad loans when we consider the situation in India. These representatives are in charge of dealing with defaulters personally and making an effort to recoup unpaid payments. Under the SARFAESI Act, the Reserve Bank of India (RBI) is in charge of regulating DRAs. When a loan becomes a non-performing asset (NPA), the borrower receives a notice requiring repayment within 60 days. If the borrower fails to pay the credit within the required period, the creditor may take action without involving the courts, including selling the loan to an asset reconstruction company at a discounted price.
Problems with Debt Recovery Methods
Finance Minister Nirmala Sitharaman addressed the mounting allegations during the most recent Lok Sabha session regarding the DRAs’ use of illegitimate means to collect loans. Numerous complaints and legal issues have been caused by the Debt Recovery Agents’ intrusive and aggressive tactics. Although the RBI has set rules to limit their excesses, this is still out of control.
A Fight for Results That Are Satisfactory
The recovery rate in DRAs has been dismal since this aggression in the traditional technique, with a success rate of only 2 out of 10 instances. This makes it very difficult for the creditor to collect the debts. And the Indian system is still having trouble dealing with a lot of NPAs. With the intention of swift adjudication and debt recovery, the government established Debt Recovery Tribunals under the RDB Act, 1993, to address this issue. The cost of the litigation, however, would be prohibitive for the creditors under this tribunal’s arrangement.
There are many problems with the conventional strategy of using DRAs for debt recovery in India, including aggressive tactics, dismal success rates, and procedural difficulties. Even though the government created Debt Recovery Tribunals to speed up the procedure, the fees continue to be an issue. Alternative approaches to debt recovery are gaining pace and could provide a more efficient and just method of collecting debt, such as litigation financing, which offers financial help to claimants during court challenges.
Legal Dispute Financing: A New Evolution
Also referred to as “Third-party funding,” this idea is still relatively new in India. A third-party funder provides financial support for the cost of litigation in this novel strategy. If the case is successful, the funder gets compensated with a portion of the winnings. Some TPF providers are known for their “NO WIN NO FEE” business strategy, which states that they only get paid if the case is won.
The slow adoption of litigation financing in India
When we consider industrialized nations like the USA and the UK that already adopted this model as early as the 2000s, making it an established practice in their legal systems, India is not an exception to the growing popularity of this technique. TPF would level the playing field for claimants who might otherwise lack the financial wherewithal to pursue their legal claims as it acquires recognition and acceptance in India.
Let us Consider a tiny business that invested heavily in costly machinery from a larger organization. When there is a disagreement over the purchase agreement, the larger company refuses to give the smaller company its money back. Instead, they make a meager settlement offer. The smaller company feels obligated to accept the subpar settlement offer due to its limited credit resources.
However, the larger organization would be aware that the disagreement could go to court if the smaller business had access to litigation finance plans. With this information, the smaller company would receive fairer and more equitable settlement conditions.
This third-party funding has the potential to increase access to justice and give claimants the freedom to pursue proper recompense without having to pay upfront fees. It is anticipated that TPF will gain traction in the Indian judicial system as awareness of it increases and the benefits of using it become more clear, giving claimants looking for a just resolution to their legal problems a useful resource.
Financial regulation in the future?
The Litigation Financing has a great deal of potential to revolutionize debt collection. The absence of clear regulation, however, presents difficulties and necessitates a strong structure to assure responsible execution. It can revolutionize debt recovery in India and offer an ethical and effective alternative to DRAs with the right regulation. Adopting litigation financing levels the playing field for claimants with low means and gives them the ability to pursue reasonable recompense by aligning with values of justice, fairness, and efficiency. India needs to embrace the future of debt forgiveness.