One-time settlement or OTS is a type of compromise settlement executed by the banks in order to recover non-performing assets (NPAs). OTS is a scheme where the borrower (the one who has defaulted) proposes to settle all the dues at once, and banks agree to accept an amount lesser than what was originally due. The banks settle the loan and waiver/write it off against a one-time instalment, thereby compromising on a portion of their profits.
The Reserve Bank of India (RBI) mandate states that banks must have a loan recovery policy that is responsible for negotiations and settlement of non-performing assets. One-time Settlement (OTS) schemes are available in all banks as an effort to deal with NPA levels. However, not every borrower is given this provision and whether to settle a bad loan account through OTS is on a sole discretion of the concerned bank based on some criteria and is not applicable in case of wilful defaults.
“As reported by Economic Times, banks have been aggressive in utilising one-time settlement scheme for settling bad loans. Among the top defaulters of the country, one of the famous business tycoon offered to pay out ₹6868 crore of his dues as OTS in April 2016, which was discarded by the lending banks.”
Impact of OTS on Banks Profitability
When a loan account becomes delinquent and turns into an NPA, banks are required to settle it as per the RBI guidelines. This provision varies depending upon the remaining due (principal and interest) and more such factors. In this scenario, banks have to compromise on their profitability by agreeing upon an amount that can be paid by the borrower on a one-time basis.
- Banks profits in the form of interest are cut down
- Quality of balance sheet is affected.
What happens in the OTS scheme?
In order to recover NPAs, banks execute a recovery drive on a regular basis, where borrowers can approach them and ask for settling their account through OTS. For this, they need to justify themselves in order to get a rebate on the interest charged or any other fee charged against the loan.
It is for the bank to decide if they have to extend this facility to the borrower or not. In case the bank holds the borrower’s security/assets and is sure to recover both the principal and interest in full, they may reject the borrower’s plea for OTS. Conversely, when the assets or prime security is inadequate, they may choose to grant a one-time settlement.
Benefits of OTS
- Prompt and speedy recovery of loans and advances
- Increase in liquidity
- Easy flow of funds that promotes a continuous lending process
- The health of the economy is maintained.
The one-time settlement schemes of NPAs in different sectors vary. It is distinct for agriculture, MSMEs and others. OTS also considers to settle bad loan accounts on the grounds of security available with them, the current financial conditions of borrower/company, their legal state etc., in case the borrower fail to offer the principal amount.
For more details about One-Time Settlement, talk to our experts. Get in touch with us and we’ll be happy to address your queries.