India’s banking and financial services sector (BFSI) is at a critical juncture in 2025. According to the Reserve Bank of India’s Financial Stability Report (June 2025), the Gross Non-Performing Asset (GNPA) ratio of scheduled commercial banks fell to 2.3% as of March 2025, marking a multi-decade low. While this appears encouraging, stress projections suggest that under normal conditions, the GNPA ratio could rise to 2.5% by 2027, and under severe economic stress, it could reach 5.6%. The decline in GNPA has been supported by higher write-offs, which moved up to 31.8% in FY25 from 29.5% the previous year, led primarily by private sector and foreign banks.2
The Finance Ministry has also urged stakeholders to reduce the DRT backlog and highlighted the role of alternative dispute resolution (ADR), including institutional arbitration and Lok Adalats, to speed up recovery and free up capital for productive use.3
Meanwhile, credit growth remains robust. Scheduled commercial banks reported 11.1% year-on-year growth in net credit by March 2025, reflecting expanding lending activity. Higher lending volumes inevitably bring higher risk, particularly for NBFCs managing small-ticket retail loans and unsecured loans. This dual reality—rapid credit expansion on one hand and potential stress on the other— highlights that India’s NPA problem is far from resolved.
Recovery Challenges in the BFSI Sector
The issue is not just about the volume of non-performing loans, but also about the speed of recovery. Debt Recovery Tribunals (DRTs), which are authorised to handle defaulted loan cases, are heavily backlogged. Currently, over 2 lakh cases are pending, with only 30,000–40,000 cases disposed of annually, while about 60,000 new cases are filed each year. At the current rate of disposal, clearing this backlog could take up to seven years.4
For banks and NBFCs, the consequences are significant:
- Liquidity crunch as capital remains tied up in unresolved cases.
- Higher cost of capital as delays in recovery make borrowing more expensive.
- Pressure on balance sheets limiting future lending capacity.
Even after identifying the defaults, the recovery process is often slow, leaving the lenders financially constrained and strategically disadvantaged in deploying their capital effectively.
Why Current Frameworks Are Not Enough
Traditional mechanisms—DRTs, SARFAESI, and IBC—were introduced and implemented for large-scale defaults, but their litigation-heavy approach creates obstruction. The RBI itself has highlighted the increasing strain in these recovery pathways.
1 Radha Gupta, Assistant Manager at WeVaad
2 https://bfsi.economictimes.indiatimes.com/articles/rbi-reports-significant-improvement-in-large-borrowers- asset-quality-and-gnpa-ratio/122171164
3 https://www.business-standard.com/economy/news/finmin-urges-joint-push-to-cut-case-backlog-at-debt- recovery-tribunals-125052401514_1.html
4 https://economictimes.indiatimes.com/industry/banking/finance/banking/banks-faces-seven-year-backlog- in-debt-recovery-cases/articleshow/112105054.cms?from=mdr
This is where alternative dispute resolution (ADR)/ Online Dispute Resolution (ODR) frameworks, especially institutional arbitration, becomes crucial in this situation. For BFSI players handling frequent borrower disputes—whether corporate NPAs or retail loans— institutional mechanisms that are time- bound, cost-effective, and efficient are increasingly essential.
Institutional Arbitration as a Game-Changer for the BFSI Industry
Institutional arbitration provides a structured, rule-based framework that can deliver faster outcomes:
- Faster resolution: WeVaad completes the arbitration within 90 days, significantly quicker than in traditional forums.
- Legally enforceable: Awards are enforceable as a decree under the Arbitration and Conciliation Act, 1996, allowing the enforcement of awards seamlessly.
- Flexibility for NBFCs: Through Institutional Arbitration, Small-ticket retail disputes, including loans with 90+ DPD (days past due), can be managed efficiently through institutional mediation and arbitration.
Institutional arbitration is not just a secondary option—it is a strategic risk management tool for the BFSI sector.
Why is the shift to institutional arbitration indispensable for the BFSI industry?
RBI’s 2025 projections provide a clear warning: while the system may appear stable now, a stressed- asset surge could happen unexpectedly. For NBFCs, a large part of their lending is made up of small loans. If these loans are not repaid on time—sometimes taking 2 years or more—it can create cash shortages for the company and harm relationships with their customers.
With outstanding loans totalling ₹186 trillion across India’s BFSI system as of July 2025, traditional approach is no longer sufficient. Delays in the recovery of outstanding loans cannot be afforded to stretch for years. Institutional arbitration provides a time-bound, cost-effective, and enforceable, making it a vital tool for future-proofing financial stability. For BFSI institutions, embracing this approach is not optional—it is indispensable.