Regulatory pressure, counterparty complexity, and the cost of having no process in place. The question is not whether disputes will arise, but whether the organisation has a credible mechanism for resolving them.
Introduction
The regulatory environment for Non-Banking Financial Companies (NBFCs) in India has changed significantly. In December 2025 alone, the Reserve Bank of India (RBI) cancelled the Certificates of Registration of 35 NBFCs under Section 45-IA(6) of the Reserve Bank of India Act, 1934. Separately, 16 NBFCs voluntarily surrendered their registrations. Some of these companies had been registered for over two decades. The message from the regulator is clear: compliance is not optional, it is essential for survival.
Despite the strong focus on capital adequacy, KYC requirements, and governance frameworks, one important area of operational risk remains under-addressed in most NBFC contracts: the dispute resolution mechanism.
When a borrower defaults, when a co-lending partner disagrees on NPA recognition, or when a fintech Lending Service Provider breaches its contractual obligations, what happens next is often unclear.
In many cases, the contract either does not define a process properly or does so in a way that is too vague to be useful.
The Regulatory Pressure Point
The RBI’s approach to supervising NBFCs has become more structured and strict. The introduction of Scale-Based Regulation in October 2021, the phased increase in minimum Net Owned Fund requirements from ₹2 crore to ₹5 crore by March 2025 and ₹10 crore by March 2027, and the consolidation of the Digital Lending Directions in May 2025 together require a much higher standard of operational governance.
The Digital Lending Directions, 2025, effective 8 May 2025, are particularly important for dispute risk. They extend accountability to all regulated entities involved in digital lending, require proper due diligence of Lending Service Providers, and make it clear that the NBFC is responsible for their actions. The Co-Lending Arrangements Directions, 2025, effective from 1 January 2026, add further complexity. Both the bank and the NBFC hold their respective portions of a co-originated loan on their own books. Disputes over NPA recognition, EMI schedules, prepayment treatment, and credit bureau reporting are not occasional issues, they are inevitable at scale.
The Problem with Post-Hoc Dispute Resolution
Most NBFC contracts include a dispute resolution clause. The issue is that these clauses are often drafted as an afterthought.
A typical clause may simply refer to arbitration under the Arbitration and Conciliation Act, 1996, without specifying the institution, the process for appointing the tribunal, expected timelines, or what happens if one party refuses to participate.
Recent Supreme Court decisions show why this level of detail matters. In Nagreeka Indcon Products (P) Ltd. v. Cargocare Logistics (India) (P) Ltd., the Court clarified that a valid arbitration agreement must clearly show an intention to arbitrate, provide for adjudication by a tribunal, and ensure that the outcome is binding and enforceable.
Even small wording differences can be decisive. For example, stating that disputes “can be settled by arbitration” may not create a binding obligation. The difference between an enforceable agreement and a non-binding statement can come down to a single word.
The Disputes Every NBFC Will Face
Borrower disputes
When borrowers default, disputes arise over outstanding amounts, interest calculations, NPA classification, and recovery agent conduct. Under the Digital Lending Directions, borrowers may also challenge disclosures, cooling-off periods, or the Key Facts Statement.
Without a pre-agreed mechanism, borrowers may approach consumer forums or civil courts while the NBFC initiates recovery. These parallel processes are inefficient. A clearly defined, independent resolution pathway in the loan agreement provides a structured alternative and demonstrates a commitment to fair grievance handling.
Co-lending partner disputes
Disagreements between co-lending partners over NPA recognition, KYC inconsistencies, and credit bureau reporting require a neutral adjudicator who understands both the regulatory framework and the commercial relationship. A pre-agreed institutional mechanism allows such disputes to be resolved without escalation to regulators or courts.
Disputes involving Lending Service Providers, particularly contractual breaches, also create regulatory exposure for the NBFC under the 2025 Directions. The ability to invoke a quick, pre-agreed dispute resolution process, instead of relying only on termination provisions that may take time to implement, is not just useful, rather, necessary.
What the Law Permits
The Arbitration and Conciliation Act, 1996 provides the legal foundation for dispute resolution.
Section 7 recognises arbitration agreements within commercial contracts. Section 2(6) allows parties to authorise an institution to manage procedural aspects. Section 8 requires courts to refer disputes to arbitration where a valid agreement exists.
An arbitral award is enforceable as a court decree, and a conciliation settlement has the same legal effect. The legal framework already exists, but what is often missing is the contractual structure required to use it effectively.
Six Elements of an Effective Dispute Resolution Clause
A well-drafted dispute resolution clause in an NBFC contract should address the following:
- Institution selection: Clearly name the dispute resolution institution and apply its rules.
- Seat and venue: Specify the legal seat, which determines the supervising court. Even if proceedings are conducted online, the seat must be defined.
- Tribunal constitution: Clarify whether there will be a sole arbitrator or a panel, and how they will be appointed.
- Timelines: Define timelines or adopt institutional rules. Without time limits, the process can become as slow as litigation.
- Escalation protocol: Provide a structured escalation path from operational discussions to senior management, followed by conciliation and then arbitration if required.
- Non-participation: Address how the process will proceed if one party does not engage, in line with Section 25(b) of the Act.
NBFCs are also increasingly incorporating multi-institutional clauses to ensure that disputes are not delayed, to protect neutrality, and give a choice to the party when the matter reaches the dispute stage.
The Cost of Inaction
The direct costs of dispute resolution are visible. The indirect costs are much larger and often overlooked.
Disputes take up time across legal, finance, collections, and compliance teams. They create reputational risks with co-lenders and regulators, and they divert senior management attention away from core business operations.
These costs increase with the duration of the dispute. In India, disputes often take years. Data from the National Judicial Data Grid suggests that fewer than 15% of execution petitions result in a final outcome. This means the impact of a dispute continues long after litigation begins.
With increased regulatory oversight, unresolved disputes can also become compliance concerns. A co-lending disagreement, repeated borrower complaints without a clear resolution process, or prolonged partner disputes may attract regulatory scrutiny. The regulator is less concerned with the outcome and more concerned with whether the NBFC had a proper process in place.
Conclusion
The window for action is narrowing. The Net Owned Fund requirement laid down by RBI, of NBFCs raising their NOF to ₹10 crore by 31 March 2027 will lead to consolidation in the sector. Increased reporting requirements and the expansion of co-lending and digital lending partnerships will increase the volume of disputes.
The time to establish a dispute resolution mechanism is before disputes arise, not after. A pre-agreed dispute resolution pathway is not a legal formality. It is a core governance requirement.
References
- Reserve Bank of India (Digital Lending) Directions, 2025, dated 8 May 2025
- RBI Co-Lending Arrangements Directions, 2025 (effective 1 January 2026)
- RBI Master Direction — NBFC — Scale Based Regulation Directions, 2023
- Arbitration and Conciliation Act, 1996 (as amended, 2015 and 2019)
- Nagreeka Indcon Products v. Cargocare Logistics, 2026 SCC OnLine SC 630
- RBI: Cancellation of Registration of 35 NBFCs, January 2026
- Federation of Indian Asset Financiers v. RBI, Madras HC, March 2025