Compromise Settlement and One-Time Settlement (OTS)
The lender takes less to close a bad loan. Here's who can agree to it, and what it doesn't wipe out.
A compromise settlement, often called a one-time settlement or OTS, is a deal where the lender accepts less than the full dues to close a bad loan, usually in one payment or a short series of payments. The lender gives up part of what it is owed in exchange for certain money now, instead of uncertain money after years of legal recovery.
Recovery agents hear "settle kar do" every day. Knowing what a settlement really is, who can approve it, and what it means for the borrower keeps you from making promises you have no power to keep.
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Three Terms People Mix Up
- Compromise settlement (OTS)
- A negotiated deal to fully settle the lender's claim in cash, with the lender giving up (waiving) part of the amount due. Once the agreed amount is paid, the lender's claim to the waived part ends.
- Technical write-off
- An accounting entry only. The bank removes a bad loan from its books, fully or partly, but does not waive anything. The borrower still owes the full amount and recovery continues.
- Restructuring
- Changing the loan terms (longer tenure, lower EMI) because the borrower is in difficulty. Under RBI's framework, a settlement whose payment period runs beyond three months is treated as restructuring.
RBI's Rules for Settlements
RBI set out one framework for all banks, NBFCs and co-operative banks in June 2023, replacing the older OTS circulars:
- check_circleEvery lender must have a board-approved settlement policy, including how much sacrifice is allowed and how the security's current realisable value is worked out.
- check_circleApproval must come from an authority at least one level higher than the one that sanctioned the loan. Anyone involved in sanctioning that loan cannot approve its settlement.
- check_circleSettlements with borrowers classified as fraud or wilful defaulter are allowed, but need board approval and do not stop criminal proceedings.
- check_circleIf the lender has already filed a case in a court or tribunal, the settlement needs a consent decree from that forum.
- check_circleSettlements must be reported upward at least every quarter, with board oversight.
The Cooling Period
After a compromise settlement, the lender must wait a cooling period before giving the same borrower a fresh loan. For anything other than farm credit, RBI sets the minimum at 12 months; lenders can set longer periods in their policies.
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How a Settlement Usually Works
- 1
The borrower or the lender proposes an amount
Usually after the account has become an NPA. Agents may pass on a borrower's request, but cannot fix or approve the amount.
- 2
The lender evaluates it
It compares the offer with what it could realistically recover from the security and through legal action, under its board policy.
- 3
Written sanction letter
The approved amount, payment dates and conditions are given to the borrower in writing.
- 4
Payment to the lender
The borrower pays through the lender's official channels and keeps receipts.
- 5
Closure
The lender issues a no-dues or settlement closure letter. For personal loans, RBI requires original property documents to be returned within 30 days of settlement, with ₹5,000 per day payable for delay caused by the lender.
What a Settlement Means for the Borrower
A settlement closes the debt, but because the lender accepted less than it was owed, it is not the same as full repayment. A borrower who settles should ask the lender, in writing, how the account will be reported to credit bureaus. For wilful defaulters, RBI's rules keep the name on the list until the full compromise amount is paid.
How the DRA Exam Tests This
The favourite trap is the difference between a compromise settlement and a write-off. In a technical write-off, nothing is waived; the borrower still owes everything and recovery continues. Expect questions on who approves a settlement (one level above the sanctioning authority), the minimum cooling period (12 months, non-farm), and whether settling with a wilful defaulter ends criminal cases (it does not).
Conduct questions may ask what an agent should do when a borrower asks for a settlement: pass the request to the lender, never promise an amount, and never collect money outside official channels.
FAQs
What is OTS in a bank loan?expand_more
One-time settlement: the lender agrees to accept a reduced amount to close a bad loan. RBI's 2023 framework calls it a compromise settlement and requires a board-approved policy and approval from an authority above the one that sanctioned the loan.
Can a recovery agent offer me a settlement?expand_more
An agent can pass your request to the lender, but only the lender's authorised officials can approve a settlement. Get the approved amount in a written letter from the lender before paying, and pay only through the lender's official channels.
If the bank writes off my loan, do I still have to pay?expand_more
Yes. A technical write-off is an accounting entry in the bank's books. RBI's framework says it involves no waiver of the claim against the borrower, and recovery continues.
How soon can I get a new loan after a one-time settlement?expand_more
The same lender must wait at least 12 months (for non-farm loans) before giving you a fresh loan, and its policy may set a longer cooling period. Other lenders decide based on your credit history.
Next steps
- NPA Classificationarrow_forward
- Strategy & Counsellingarrow_forward
- Lok Adalatarrow_forward
- Wilful Defaulterarrow_forward
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