What is One Time Settlement (OTS)?

In the modern era of credit expansion in India, the burden of debt has become a significant reality for millions of individuals and businesses. While loans provide the necessary capital for growth, home ownership, and personal aspirations, they also carry the risk of becoming unmanageable during times of economic instability. One Time Settlement, commonly abbreviated as OTS, stands as a critical financial tool designed to resolve these situations when all other repayment avenues have reached an impasse.

Financial distress is rarely a choice. It is often the result of unforeseen circumstances such as a global pandemic, a sudden business downturn, a loss of primary employment, or a catastrophic medical emergency within the family. When a borrower fails to meet their EMI obligations for ninety consecutive days, the loan account is technically classified as a Non-Performing Asset or NPA. At this juncture, the relationship between the lender and the borrower shifts from transactional to one involving recovery and legal procedures.

This is where the concept of One Time Settlement enters the picture. It is not merely a waiver of debt but a strategic compromise between a financial institution and a borrower. Banks, being commercial entities, recognize that a prolonged legal battle to recover funds can be expensive, time consuming, and often yields uncertain results. By offering an OTS, the bank chooses to recover a guaranteed portion of the debt today rather than waiting years for a full recovery through the courts. For the borrower, it offers a definitive end to the stress of debt, the cessation of recovery agent calls, and the clearing of their legal name.

In this exhaustive guide, we will explore the depths of the OTS mechanism in India. We will look at how it differs from a regular settlement, the latest guidelines issued by the Reserve Bank of India, and the practical steps you can take to secure a favorable outcome for your specific case. Whether you are struggling with a personal loan, a credit card debt trap, or a business loan that has gone south, understanding what an OTS is will empower you to make informed decisions for your financial future.

At its core, a One Time Settlement is a mutual agreement where the bank agrees to settle the outstanding debt for an amount that is less than the total dues, provided the payment is made in a single lump sum or within a very short, specified timeframe. This process usually involves the bank waiving off the accrued interest, penal interest, and other charges, and in many instances, even a portion of the principal amount itself.

It is important to distinguish OTS from 'Loan Restructuring'. In restructuring, the bank changes the terms of the loan such as the tenure or the interest rate to help you pay the full amount over a longer period. In OTS, the account is closed forever after paying the negotiated amount. It is the finality of the process that makes it attractive to both parties.

Historically, OTS schemes were primarily used for agricultural and small business loans during periods of natural disaster or severe economic depression. However, with the rise of retail banking, OTS is now commonly applied to personal loans, credit cards, education loans, and home loans. The mechanics of the process are governed by the internal board approved policy of each bank, which in turn must adhere to the broad framework provided by the Reserve Bank of India.

When a bank offers an OTS, it is essentially declaring that the cost of recovery is higher than the benefit of waiting for the full amount. This 'cost of recovery' includes legal fees for filing cases in the DRT (Debt Recovery Tribunal), salaries of the recovery team, the opportunity cost of having an NPA on the books which requires higher capital provisioning, and the risk that the borrower might eventually file for insolvency.

The landscape of debt settlement in India underwent a tectonic shift with the RBI's 'Framework for Compromise Settlements and Technical Write-offs' issued in 2023 and reinforced in 2024. These guidelines were introduced to bring transparency and efficiency to the way banks handle stressed accounts.

Perhaps the most debated aspect of the new guidelines is the inclusion of 'Wilful Defaulters' and 'Fraud Accounts' in the compromise settlement framework. While critics argued this rewards dishonesty, the RBI clarified that this is a pragmatic step to allow banks to recover as much money as possible from stuck accounts. However, for a wilful defaulter to enter into an settlement, the process is far more rigorous, often requiring high level approvals and strictly excluding them from fresh credit for longer periods.

For the average borrower, these guidelines are a blessing. They provide a predictable environment where you can demand to see the bank's OTS policy. It also mandates that the bank must provide a clean 'No Dues Certificate' once the settlement amount is paid, ensuring you have the legal proof required to close the chapter on your debt.

The RBI also emphasizes that banks must ensure 'fair treatment' of borrowers during the settlement process. This includes stopping all coercive recovery practices once a formal settlement proposal is under active consideration. If a bank continues to harass you after you have submitted a valid OTS request, you have the right to approach the Banking Ombudsman.

Not every borrower who wants a waiver will get one. Banks use a strict set of criteria to determine if a case is suitable for a One Time Settlement. Understanding these criteria can help you assess your own chances of success.

• 1

  NPA Classification

  The primary requirement is that the account must be an NPA (Non-Performing Asset). Typically, an account must be in default for at least 90 to 180 days before the bank even considers it for a settlement. Accounts that are currently 'regular' are not eligible for OTS waivers.

• 2

  Genuine Hardship Proof

  You must be able to prove that you *cannot* pay the full amount due to reasons beyond your control. Having the money in your bank account while asking for a waiver is a recipe for rejection. The bank will scrutinize your bank statements and income tax returns to verify your financial status.

• 3

  Value of Collateral

  For secured loans, the eligibility depends heavily on the value of the asset. If you owe 50 Lakhs but the property you pledged is worth 1 Crore, the bank is unlikely to give you a principal waiver because they can recover the full amount by selling the property. OTS is more common when the debt exceeds the value of the security.

• 4

  Age of the Debt

  Older defaults are generally more eligible for deeper waivers. A debt that has been outstanding for five years is seen as a higher recovery risk than a debt that is six months old. Banks often 'write off' older debts in their ledger, making them more flexible during negotiations.

As the largest public sector lender in India, State Bank of India (SBI) often leads the way in introducing comprehensive OTS schemes for its borrowers. SBI typically categorizes its OTS offerings based on the type of loan and the amount of default. The 'Rinn Samadhan' or similar schemes are often launched during specific periods of the year to encourage borrowers to clear their long-standing dues.

For agricultural borrowers, SBI frequently announces special waivers where the entire interest component might be forgiven if the principal is paid. For retail borrowers with personal loans or credit card debts (SBI Card), the bank follows a policy that looks at the 'net present value' of the recovery. If the account is a chronic NPA, the degree of waiver can be significant.

In 2024, SBI's policy focus has been on resolving small ticket loans up to 20 Lakhs through digital channels or simplified branch level approvals. This reduces the time taken for a sanction from months to just a few weeks. However, for larger loans exceeding 50 Lakhs, the case moves to the Zonal or Local Head Office (LHO) for a more rigorous audit. Understanding which tier of SBI is handling your case is the first step in successful negotiation.

The 'SBI UTS' (Uniform Tracking System) ensures that once a settlement is entered, it is tracked across the country. This means you cannot settle a loan in one branch and expect the bank to ignore it in another. Consistency in documentation is paramount when dealing with SBI.

While public sector banks like PNB, Bank of Baroda, and Canara Bank follow a process similar to SBI, private sector giants like HDFC Bank, ICICI Bank, and Axis Bank have a more aggressive approach to debt recovery and settlement.

HDFC Bank OTS: HDFC is known for its focus on recovering the principal amount. They are often willing to settle credit card debts (which have high interest components) for a reasonable percentage of the total outstanding, provided the hardship claim is verified. They use specialized recovery agencies, but the final settlement authority remains with their central credit team.

ICICI Bank OTS: ICICI Bank often utilizes 'Settlement Camps' in major cities where borrowers can meet bank officials directly to negotiate. Their policy is data driven: if their internal system predicts a low probability of recovery through legal means, they are more open to a generous settlement.

Axis Bank and Kotak Mahindra: These banks often look for a settlement that covers at least their 'book value'. If you can offer an amount that ensures the bank doesn't show a huge loss on its books, you have a high chance of approval. They also prioritize closures before the end of the financial quarter.

For NBFCs like Bajaj Finserv or Tata Capital, the OTS process is often faster but the waivers might be slightly lower compared to large banks. NBFCs are more flexible with payment timelines, allowing 3 to 6 installments for the settlement amount.

The strategy for a One Time Settlement is not 'one size fits all'. Each loan type has its own nuances and leverage points during negotiation.

1. Unsecured Personal Loans

These are the most common candidates for OTS. Since there is no collateral, the bank's only recourse is legal action. Once the legal costs start mounting, the bank becomes highly motivated to settle. You can often achieve waivers as high as 50% to 70% of the total outstanding interest and a part of the principal.

2. Credit Card Dues

With interest rates often exceeding 40% per year, credit card debt grows exponentially. Banks are aware that these rates are unsustainable for a person in distress. Credit card settlements are usually the fastest to conclude. They often look for a payment that covers the original spent amount plus a small portion of the interest.

3. MSME and Business Loans

For business loans, the bank looks at the 'surviving capacity' of the business. If the business has shut down, they are very open to an OTS. However, if the business is still running, they might prefer restructuring over a settlement. Showing a closure of GST registration or a business loss report from a Chartered Accountant is key here.

4. Education Loans

Education loan settlements are handled with a bit more empathy, especially if the student has not secured a job. However, the bank will check the financial status of the parents who are usually co-applicants. If the parents have assets, the bank will be less likely to give a large waiver.

Navigating an OTS can feel like walking through a labyrinth of banking terminology and hierarchy. Here is a clear, simplified roadmap of the process from start to finish.

Negotiating with a large bank can feel like a David versus Goliath battle. However, you have more leverage than you might think. A bank with an NPA wants to recover money just as much as you want to pay it off. Here are strategies to negotiate like a professional.

Remember, silence is also a tool. If the bank insists on an amount you cannot pay, do not agree to it immediately. Reiterate your financial position and let them know you will have to look at other legal options like insolvency if a fair settlement is not reached. This subtle nudge often makes them reconsider their stance.

Documentation is the backbone of a successful One Time Settlement. A missing document can delay the process by weeks or even lead to rejection. Compile the following into a comprehensive file before you begin.

One of the biggest concerns for borrowers is the impact on their credit score. It is vital to be transparent: an OTS is not a clean slate in the eyes of credit bureaus. When you settle a loan, the credit bureau reports the status as 'Settled'. This is different from 'Closed', which indicates full repayment.

A 'Settled' status tells future lenders that you did not fulfill your original promise to pay the full amount. This can make it difficult to get new unsecured loans like personal loans or credit cards for the next 2 to 5 years. However, this is not a life sentence.

From a logical perspective, a 'Settled' status is much better than an 'Active Default' or 'Written Off' status. A default means you have an open wound in your financial history that is festering every month. A settlement is like a scar: it shows you had a problem, but it also shows the problem is now resolved. Over time, scars fade, and so does the negative impact of an OTS.

Is One Time Settlement the right choice for you? Let's break down the advantages and disadvantages objectively.

One of the main reasons borrowers seek an OTS is to stop the unethical practices used by recovery agents. It is crucial to know that the Supreme Court of India and the RBI have laid down very strict rules that recovery agents must follow.

Once you hire a legal firm for your OTS, we send a formal notice to the bank stating that all communication should be routed through us. This acts as a legal shield. If the harassment continues, we can file a police complaint (FIR) under Section 506 (Criminal Intimidation) or move the consumer court for damages. Knowledge of your rights is your strongest defense during the debt struggle.

Being in debt is not just a financial burden; it is a profound psychological weight that affects every aspect of a person's life. The constant pressure of mounting interest, the fear of legal notices, and the relentless calls from recovery agents can lead to severe anxiety, depression, and a sense of isolation. Many borrowers experience a loss of self-esteem and a feeling of being 'trapped' with no way out.

This psychological toll often leads to 'ostrich syndrome', where the borrower ignores all communications from the bank, hoping the problem will go away. Unfortunately, this only worsens the situation as penalties continue to pile up. A One Time Settlement offers a psychological breakthrough. It provides a 'light at the end of the tunnel' and a tangible goal to work towards.

The moment an OTS sanction letter is received, there is often an immediate sense of relief. It marks the transition from being a 'debtor' to being someone who has successfully resolved their financial obligations. At AMA Legal Solutions, we understand this human element. We don't just provide legal support; we provide the empathy and clarity needed to navigate the emotional turmoil of debt recovery.

There is a lot of misinformation surrounding One Time Settlements. Let's clear the air on some of the most common myths.

Myth 1: 'OTS is only for the rich or large businesses.'
Reality: OTS is for everyone. From a 50,000 rupee credit card debt to a 50 Crore corporate loan, the principle of compromise remains the same. Banks are often more flexible with small retail loans because they are easier to process.

Myth 2: 'My bank is obligated to give me an OTS if I ask.'
Reality: OTS is a matter of compromise, not a matter of right. While RBI guidelines mandate a board approved policy, the bank has the final say on whether to accept your specific offer based on their recovery risk assessment.

Myth 3: 'An OTS is a criminal record.'
Reality: Absolutely not. An OTS is a civil financial arrangement. It does not appear on any police record or impact your ability to travel or hold a government job. It only appears on your credit report.

Myth 4: 'I can get an OTS immediately after missing one EMI.'
Reality: No. Banks usually wait until the account is a 'Sub-Standard' or 'Doubtful' NPA (90+ days of default) before talking about a settlement. They first try to recover the full amount through regular follow ups.

To help you understand the practical application of OTS, let's look at three diverse success stories from our archives at AMA Legal Solutions.