Debt Recovery Agents vs Litigation Financing: Evaluating Their Effectiveness in India
In the complex world of financial services, debt recovery is a crucial challenge for banks and institutions. Two main solutions have emerged: Debt Recovery Agents (DRAs) and Litigation Financing. While DRAs have been less effective due to aggressive tactics and legal concerns, a promising alternative called Litigation Financing or Third-Party Funding (TPF) has emerged. TPF involves third-party funders supporting litigation costs in exchange for a share of the proceeds in successful cases. The lacking regulation in DRA gives push to TPF as it allows claimants to access the justice and peruse for their own claims even with limited financial sources.
When we look at the Indian scenario debt recovery agents are being traditional solutions for financial institution to recover their bad loans. These agents are responsible for interacting directly with defaulters and attempting to recover outstanding debts. The Reserve Bank of India (RBI) oversees the regulation of DRAs under the SARFAESI Act. When a loan becomes a Non-Performing Asset (NPA), the borrower receives a notice demanding repayment within 60 days and if the borrower fails to pay the credit within the required period, The creditor can take action without any involvement of Judicial authorities and which includes selling of the loan to an Asset reconstruction company at the discounted rate.
In the recent session of Lok Sabha, Finance Minister Nirmala Sitharaman acknowledged the growing complaints about the illegal methods used by DRAs to recover loans. These aggressive and intrusive methods used by Debt Recovery Agents have resulted in numerous complaints and legal problems. The RBI has issued guidelines to curb their excesses but this is uncontrolled.
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