Banks in India will soon have a formal mechanism for commercial dispute resolution according to the Indian Banks' Association (IBA), the voluntary banks' umbrella organisation that is drawing up a blueprint for a comprehensive arbitration service.

The new mechanism will be used to handle all types of disputes, including those over letters of credit (L/Cs), collections and guarantee obligations.

Comprehensive mechanism

India currently lacks a mechanism to resolve all disputes between banks, regardless of the type of dispute, the amount of money involved or whether parties to the dispute are private or public sector banks.

The IBA is framing the mechanism to fit the Arbitration & Conciliation Act, 1996 and it is in the process of establishing an arbitration committee to approve experts capable of acting as arbitrators.

Current mechanisms

Currently, public sector institutions can resort to a state-run arbitration mechanism but private sector, foreign and co-operative banks do not have access to this service.

An ombudsman Scheme, 2002, which also tackles inter-bank disputes, has limited scope as it can take up disputes of only up to Rs 10 lakh (US$20,871).

Arbitrators

Under the new mechanism, a sole arbitrator will hear inter-bank disputes of up to Rs 50 lakh (US$104,374) while a tribunal of two to three arbitrators will take on cases involving larger amounts.

Banks will be able to choose arbitrators that are mutually acceptable and resolve disputes in the location of their choice. The IBA will maintain a special registry of cases and complaints.

The IBA says it has circulated draft rules for the arbitration mechanism to member banks. Once they have provided feedback, the IPA says it will finalise the rules.

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