One Time Settlement Scheme: Loan OTS with Bank Procedure in India

A One-Time Settlement (OTS) Scheme is a mechanism in India where a borrower and a bank agree to settle a non-performing loan (NPL) or non-performing asset (NPA) for a lump sum amount, typically less than the total outstanding debt. This process benefits both parties: the bank recovers a portion of the loan without lengthy legal proceedings, and the borrower resolves their debt, avoiding further financial and legal strain. Below is an overview of the typical procedure for availing an OTS with a bank in India, based on common banking practices and guidelines from the Reserve Bank of India (RBI).

Procedure for Loan OTS with a Bank in India

1. Assess Eligibility and Initiate Contact:
   • The borrower must first confirm their loan has been classified as an NPA by the bank (typically after 90 days of non-payment). Not all borrowers qualify for OTS; eligibility depends on the bank’s policies, the age of the loan, the outstanding amount, and the borrower’s financial situation.
   • Approach the bank (usually the branch where the loan was availed) to express willingness to settle the debt via OTS. Some banks, like Bank of Baroda, offer online platforms to submit OTS requests.
2. Submit a Formal Request:
   • Write a letter or fill out an application (if provided by the bank) detailing your intent to settle the loan. Include reasons for default (e.g., financial hardship, job loss, or medical issues) and supporting documents (e.g., income statements, medical records, or business loss proof).
   • Some banks may require an upfront payment (e.g., 5-10% of the OTS amount) to demonstrate commitment, which is held in a no-lien account and adjusted later.
3. Negotiation Process:
   • The bank evaluates the borrower’s financial condition, the value of any collateral, and the loan’s history (e.g., how long it has been an NPA). The settlement amount is often based on the outstanding principal, interest accrued, and the realizable value of securities.
   • Negotiations ensue to determine the final OTS amount. This could be a percentage of the total dues, often lower than the original amount, depending on the bank’s recovery strategy and the borrower’s repayment capacity.
4. Bank Approval:
   • The proposal is reviewed by a committee within the bank (e.g., a compromise committee), as per RBI guidelines. The committee ensures the settlement maximizes recovery with minimal loss to the bank.
   • Once approved, the bank issues an OTS sanction letter outlining the settlement amount, payment timeline (typically 3 months to 1 year), and terms. For instance, a cash discount (e.g., 10%) might apply if paid within a short period (e.g., 10 days).
5. Payment and Documentation:
   • The borrower arranges funds to pay the agreed amount, either as a lump sum or in installments (e.g., 25% upfront and the rest within a year, with interest). Funds could come from personal savings, asset liquidation, or a new loan from another lender.
   • Upon full payment, the bank issues a No Objection Certificate (NOC) or settlement letter, confirming the debt is settled and the loan account is closed.
6. Post-Settlement Steps:
   • The bank updates the borrower’s credit report with credit bureaus (e.g., CIBIL) as “settled” rather than “closed” or “paid in full.” This distinction may negatively impact the borrower’s credit score, affecting future loan eligibility for up to 7 years.
   • Retain all documentation (OTS letter, payment receipts, NOC) as proof of settlement.

Key Considerations

• Bank Policies: Each bank has its own OTS scheme, often aligned with RBI guidelines. Some may exclude willful defaulters or borrowers with high recovery potential.
• Impact on Credit Score: Settling a loan marks it as “settled,” which can lower your credit score and signal risk to future lenders.
• Funding the Settlement: Borrowers may need to liquidate assets, borrow from friends/family, or seek specialized OTS funding from financial institutions.
• Legal Proceedings: If legal action (e.g., under the SARFAESI Act) has started, OTS may still be possible if the borrower acts promptly before asset possession or auction.

Example Timeline

• Day 1: Borrower submits OTS request with upfront payment.
• Week 1-2: Bank assesses and negotiates the settlement amount.
• Week 3: OTS sanction letter issued (e.g., pay ₹5 lakh within 3 months for a ₹7 lakh debt).
• Month 1-3: Borrower pays the amount.
• Month 4: Bank issues NOC, closes the account, and updates credit bureaus.

The OTS process in India is a practical solution for resolving NPAs, but it requires proactive communication, negotiation, and financial planning. Borrowers should weigh the immediate relief against long-term credit implications and explore alternatives (e.g., loan restructuring) before opting for OTS. For specific details, contact your bank, as procedures and schemes vary.

A One Time Settlement (OTS) scheme is a mechanism offered by banks and financial institutions in India to borrowers who are struggling to repay their loans. It allows borrowers to settle their outstanding debt by paying a lump sum amount, which is usually less than the total amount owed.

Understanding OTS:

• Purpose:
  • To help banks recover a portion of their non-performing assets (NPAs).
  • To provide borrowers with a chance to clear their debt and avoid further legal action.
• Eligibility:
  • Generally, borrowers whose loans have become NPAs are eligible for OTS.
  • The specific eligibility criteria may vary from bank to bank.
• Key Features:
  • A negotiated settlement amount, often involving waivers of interest and penalties.
  • A specified timeframe for making the settlement payment.
  • Clearance of the borrower’s credit history upon successful completion of the OTS.

Procedure for Loan OTS:

1. Identifying the NPA:
   • The bank classifies a loan as an NPA when the borrower fails to make payments for a specified period (usually 90 days).
2. Bank’s Initiative or Borrower’s Application:
   • Banks may proactively offer OTS schemes to eligible borrowers.
   • Borrowers can also initiate the process by submitting an application to the bank, expressing their willingness to settle the loan.
3. Application and Documentation:
   • The borrower needs to submit a formal application to the bank, along with supporting documents, such as:
     • Loan account details.
     • Proof of income and assets.
     • A proposal for the settlement amount.
     • Any other documentation that the bank requires.
4. Negotiation and Settlement:
   • The bank evaluates the borrower’s application and negotiates the settlement amount.
   • Factors considered include:
     • The borrower’s financial capacity.
     • The value of the collateral (if any).
     • The bank’s recovery prospects.
   • The bank will then provide a written offer, outlining the settlement amount and the payment terms.
5. Payment and Closure:
   • If the borrower agrees to the settlement terms, they must make the payment within the specified timeframe.
   • Upon successful payment, the bank issues a “No Dues Certificate,” confirming the closure of the loan account.
6. Credit History Update:
   • The bank updates the borrower’s credit history with credit information companies (like CIBIL) to reflect the settled status of the loan. This process may take time, and it is important to follow up with the bank to ensure that the credit report is updated correctly.

Important Considerations:

• Bank’s Discretion:
  • The bank has the final say in approving or rejecting an OTS application.
• Terms and Conditions:
  • Borrowers should carefully review the terms and conditions of the OTS agreement before accepting it.
• Legal Implications:
  • It’s advisable to seek legal counsel to understand the legal implications of the OTS.
• Credit Score Impact:
  • While OTS clears the specific debt, it still reflects a settled account, which can have some negative impact on the credit score, though less severe than an active NPA.
• RBI Guidelines:
  • Banks must adhere to the Reserve Bank of India (RBI) guidelines regarding OTS schemes.

OTS offers a pathway to resolve loan defaults, but it’s crucial to understand the procedure and potential consequences before proceeding.