One-time settlement
Also called: OTS, Compromise settlement · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
A one-time settlement (OTS) is a deal in which a lender accepts a smaller lump sum from a defaulting borrower. It treats this payment as settling the loan in full. The bank takes a loss but gets quick cash and avoids long court battles. RBI's June 2023 compromise-settlement framework allows such settlements even for wilful-defaulter and fraud accounts. A 12-month cooling-off period applies before the settled borrower can get fresh credit.
Example
A borrower owes a bank Rs 1 crore on a defaulted loan. The collateral is hard to sell, so the bank agrees to take Rs 60 lakh in one payment and close the account. It records a loss of Rs 40 lakh.
Don't confuse with
- Loan write-off: removes the loan from the bank's books, but the borrower still owes the full amount and recovery continues. After an OTS, the settled amount closes the debt.
- Haircut under IBC: a loss creditors accept through a formal insolvency process. An OTS is a direct, voluntary deal between the bank and the borrower.
Related concepts
- Twin balance sheet problem
- Evergreening
- Asset Quality Review
- Loan restructuring
- Bank recapitalisation
- Loan write-off
- Wilful defaulter