Introduction
Financial distress can strike any borrower—whether an individual, a small business, or a farmer—leading to loan defaults and mounting liabilities. When a loan turns into a Non-Performing Asset (NPA), both the borrower and the bank face significant challenges. However, a One-Time Settlement (OTS) offers a structured and legally binding solution to resolve such defaults amicably.
This blog explores the legal framework, process, benefits, and risks of OTS, helping borrowers and financial institutions make informed decisions.
What is a One-Time Settlement (OTS)?
An OTS is a contractual agreement between a bank and a borrower, where the bank agrees to settle a defaulted loan for a reduced amount. The borrower repays this amount either in a lump sum or structured installments within a stipulated timeframe. Upon full payment, the remaining debt is waived off, and the account is closed.
Legal Basis of OTS
An OTS is not just a commercial negotiation but a legally enforceable contract governed by:
- Indian Contract Act, 1872 (validity of agreements)
- SARFAESI Act, 2002 (debt recovery mechanisms)
- Banking Regulation Act, 1949 (banking operations)
- RBI Guidelines (NPA classification & settlement norms)
- Bank-specific policies (PSU/private bank circulars)
Once both parties agree, the OTS overrides the original loan terms, and any breach can lead to legal action.
When is OTS Applicable?
Banks typically consider OTS in the following scenarios:
✅ The loan account has been classified as an NPA (90+ days overdue).
✅ The borrower is unable to repay the full outstanding amount.
✅ The bank has initiated recovery proceedings (SARFAESI notices, DRT cases).
✅ The borrower demonstrates a genuine willingness to settle.
Common Loan Types Eligible for OTS
- Personal loans
- MSME & SME business loans
- Agricultural loans
- Overdrafts & cash credit facilities
- Credit card debts
Key Features of OTS
🔹 Reduced Repayment: Borrower pays less than the total outstanding.
🔹 Flexible Payment: Either lump-sum or structured installments.
🔹 Full & Final Closure: Account marked as “settled” upon payment.
🔹 Waiver of Penalties: Banks often waive penal interest & legal charges.
🔹 Credit Impact: Reported as “Settled” (may affect future creditworthiness).
The OTS Process: Step-by-Step
- Application Submission
- Borrower submits a written request or fills an OTS form, explaining financial hardship.
- Bank’s Evaluation
- The bank assesses:
- Outstanding amount
- Collateral value
- Repayment history
- Reason for default
- The bank assesses:
- OTS Offer Proposal
- The bank presents a final settlement amount with terms & timeline.
- Acceptance & Agreement
- Borrower signs a legally binding OTS agreement.
- Payment & Closure
- Upon full payment, the bank issues a No Dues Certificate and updates credit bureaus.
Benefits of OTS
For Borrowers:
✔ Debt Relief – Exit from financial distress.
✔ Avoid Legal Action – Prevents SARFAESI auctions or DRT cases.
✔ Interest Waiver – Reduces mounting liabilities.
✔ Fresh Start – Opportunity to rebuild finances.
For Banks:
✔ Faster Recovery – Reduces NPAs efficiently.
✔ Cost Savings – Avoids lengthy litigation.
✔ Improved Financial Health – Cleans up balance sheets.
Risks & Drawbacks
⚠ Credit Score Impact – “Settled” status may affect future loan approvals.
⚠ Legal Consequences – Defaulting on OTS reinstates original recovery proceedings.
⚠ Collateral Risk – Failure to pay may lead to asset seizure.
⚠ Negotiation Challenges – Not all borrowers secure favorable terms.
Important Legal Precedents on OTS
- Central Bank of India vs Ravindra (2001) – SC ruled against unfair compound interest charges.
- Punjab National Bank vs Union of India (2010) – HC upheld borrower’s right to OTS during recovery.
- Indian Bank vs Blue Jaggers Estates Ltd. (2020) – Banks cannot retract OTS without valid reason.
Legal Tips for Borrowers
🔸 Get Everything in Writing – Ensure the OTS agreement is signed by an authorized bank officer.
🔸 Avoid Oral Promises – Only written commitments hold legal value.
🔸 Obtain a No Dues Certificate – Essential for future financial transactions.
🔸 Seek Legal Help if Denied OTS Unfairly – Approach the Banking Ombudsman or file a Writ Petition in High Court.
🔸 Consult a Lawyer for Complex Cases – Professional negotiation improves settlement terms.
Conclusion
An OTS is a win-win solution for borrowers facing genuine financial hardship and banks looking to recover bad loans. However, it must be approached with legal caution—proper documentation, adherence to terms, and professional guidance ensure a smooth resolution.
If you’re struggling with debt and seeking an OTS, consult a legal expert to negotiate the best terms and safeguard your financial future.
Need Legal Assistance?
B S Makar, Advocate
Punjab & Haryana High Court
📞 9878131111 | 🌐 www.makarlaws.com
🏛 B S Makar Advocates & Solicitors, Mohali
Expertise: OTS Negotiations | SARFAESI & DRT Matters | Loan Restructuring | Debt Disputes
(Disclaimer: This blog is for informational purposes only. Consult a legal expert for case-specific advice.)
