One Time Settlement (OTS) in India —
Legal Framework, RBI Guidelines, and Enforcement

What Is OTS and When Is It Available?

A One Time Settlement (OTS) — referred to as a “compromise settlement” in RBI circulars — is a negotiated resolution between a bank (or NBFC or ARC) and an NPA borrower, where the bank agrees to accept a lump sum or structured payment that is less than the total outstanding dues (principal plus accrued interest plus charges), in full and final satisfaction of the NPA account. The borrower pays the agreed OTS amount, and the bank closes the NPA account, returns or releases the securities, and provides a no-dues certificate.

OTS is available only for accounts classified as Non-Performing Assets (NPAs) under the RBI’s Income Recognition and Asset Classification (IRAC) norms — i.e., accounts where the borrower has been in default for 90 days or more. Standard assets (accounts that are current or technically in default for less than 90 days) cannot be subject to OTS. Substandard, doubtful, and loss accounts — including fully written-off accounts — are eligible for OTS.

OTS is not a right available to the borrower — it is a commercial decision made by the bank. The bank has no obligation to entertain an OTS proposal, and the RBI framework specifically states that the bank’s decision on an OTS proposal is a commercial judgment that the regulator will not override. However, where the bank’s Board-approved policy provides for OTS in certain account categories, the bank must apply the policy consistently and cannot arbitrarily deny OTS to an eligible borrower on grounds not specified in the policy.

RBI Master Framework June 2023 — Key Changes

The Reserve Bank of India issued the “Master Framework for Compromise Settlements and Technical Write-offs” (RBI/2023-24/23) in June 2023. This Framework replaced the earlier circulars on OTS — including the 2019 Prudential Framework — and established a uniform policy for all RBI-regulated entities.

Key changes introduced by the June 2023 Framework:

• Wilful defaulters and fraud accounts included: The Framework for the first time explicitly permits compromise settlements with accounts classified as wilful default or fraud, subject to conditions. The settled wilful defaulter/fraud account holder faces a 12-month cooling-off period before accessing fresh credit from the banking system, and the board must record specific justification. This was a controversial inclusion — the Framework acknowledges that recovery via settlement is sometimes preferable to prolonged litigation that yields nothing for the bank.
• IBC CIRP accounts permitted: The Framework explicitly permits compromise settlements with corporate debtors undergoing CIRP under the IBC. This is significant because banks previously hesitated to engage in parallel OTS negotiations while participating as financial creditors in the CIRP — the June 2023 Framework removes this ambiguity.
• Board-approved policy mandatory: All regulated entities must have a Board-approved policy for compromise settlements in place. The policy must specify: eligibility criteria, approval authority at each settlement amount level (branch, regional, zonal, board), minimum OTS amount, timeline for completion, and post-settlement credit reporting.
• Credit Guarantee Fund Trust accounts excluded: Accounts guaranteed by CGTMSE or similar credit guarantee schemes are not eligible for OTS without the consent of the guarantor fund — a practical constraint that borrowers with CGTMSE-guaranteed MSME loans must navigate.

Eligibility — Which Accounts Qualify for OTS?

Under the June 2023 Framework, the following account categories are eligible for OTS:

• Substandard accounts (NPA for less than 12 months from the date of NPA classification)
• Doubtful accounts (NPA for 12 months or more)
• Loss accounts (including fully written-off accounts)
• Wilful default accounts (subject to the 12-month cooling-off post-settlement)
• Fraud accounts (subject to specific board justification and the 12-month cooling-off)
• Accounts undergoing CIRP under the IBC

The outstanding amount in the account is not a barrier to OTS eligibility — the Framework does not set a minimum outstanding amount below which OTS is unavailable. However, in practice, banks generally focus OTS efforts on accounts with outstanding amounts above Rs.1 crore, as the cost of OTS processing (Credit Committee time, legal documentation, NOC issuance) is not economical for smaller accounts, which are typically handled through the bank’s Recovery Agents or Lok Adalat proceedings.

For accounts where Unified Chambers has been retained for NPA recovery, we routinely assess OTS viability as one track alongside DRT and SARFAESI enforcement — particularly where early OTS completion would produce a higher NPV of recovery than a contested multi-year DRT proceeding.

The OTS Process — Bank Board Approval and Credit Committee

The OTS process in a bank involves multiple approval layers, and understanding them is essential for borrowers seeking to negotiate effectively:

• Borrower submits OTS proposal: The borrower (typically through counsel or a turnaround advisor) submits a written OTS proposal to the bank’s Recovery/NPA department, specifying: the proposed OTS amount; the timeline for payment (single payment or installments); the basis for the proposed amount (referencing the security valuation, the borrower’s financial position, and comparative recovery expectation); and any conditions attached to the proposal.
• Bank’s internal assessment: The bank’s Recovery department prepares an internal note assessing the proposal against its Board-approved policy — checking eligibility, comparing the OTS amount against the net present value of expected recovery through litigation/enforcement, and recommending acceptance or counter-proposal.
• Credit Committee approval: Most banks require the approval of the bank’s Credit Committee (typically comprising senior management and a Board-level director) for OTS amounts above a specified threshold — commonly Rs.5 crore and above. The Credit Committee reviews the internal assessment and either approves the OTS, rejects it, or authorises the bank to make a counter-proposal to the borrower.
• Board approval for large accounts: For accounts above the Credit Committee’s delegated authority (often Rs.25 crore and above in large banks), the Board of Directors must approve the OTS. This adds time to the process — board meetings are typically monthly.
• OTS letter issued: Once approved, the bank issues an OTS sanction letter specifying: the agreed OTS amount, payment schedule (upfront + installments), validity of the OTS offer (typically 90–120 days), conditions (no transfer of assets, securities to remain in bank’s name until completion), and consequences of default.
• OTS completion: Upon receipt of the full OTS amount, the bank issues a No Dues Certificate (NDC), withdraws all DRT/SARFAESI proceedings, returns or releases the original title documents, and reports the account as settled/upgraded in the credit bureau (CIBIL) as required by the June 2023 Framework.

The OTS Deed — Essential Clauses and Enforceability

The OTS settlement deed (also called a compromise deed or consent terms) is the binding contract between the bank and the borrower. It should contain the following essential clauses:

• Parties and recitals: Identification of the borrower, co-borrowers, guarantors (who must all join the deed), and the bank. Recitals narrating the loan history and NPA status.
• OTS amount and payment schedule: The precise agreed OTS amount, payment dates, and the account into which payments are to be made.
• Consequence of default: An express clause that failure to pay any installment by the due date entitles the bank to treat the OTS as having failed, revoke the OTS sanction, and resume all enforcement proceedings from where they were suspended, with full rights to claim the original outstanding amount (minus payments made under the OTS).
• Suspension of proceedings: The bank’s undertaking to keep DRT and SARFAESI proceedings in abeyance until the OTS is completed or defaulted upon.
• Guarantee release: Where guarantors are party to the deed, a clause specifying that upon completion of OTS payment, the guarantors are released from all liability under the guarantee deeds.
• Security release: The bank’s undertaking to return original title documents and issue CERSAI discharge upon receipt of full OTS amount.

The OTS deed is enforceable as a contract under the Indian Contract Act, 1872. In several cases before DRTs, borrowers have attempted to enforce OTS deeds against banks — claiming that the bank accepted the OTS amount but refused to issue an NDC or release securities. DRTs have jurisdiction to enforce OTS deeds where the OTS was entered into during the course of DRT proceedings, treating the deed as consent terms that the DRT can enforce as part of its powers under Section 19 of the RDDB Act.

Tax Treatment — Section 41(1) Income Tax Act

The waiver of debt in an OTS creates a tax consequence for the borrower that is frequently overlooked in OTS negotiations. Section 41(1) of the Income Tax Act, 1961 deals with “profits chargeable to tax” — specifically, amounts that were allowed as deductions in earlier years but have subsequently ceased to be payable.

In the context of an OTS: if the borrower had claimed a deduction for accrued interest on the loan in earlier years (which is common for business borrowers where the loan interest is a business expense), and the bank now waives that accrued interest as part of the OTS, the waived interest amount is treated as a “cessation of liability” under Section 41(1) and is taxable as income in the year in which the OTS deed is executed.

The principal amount waived (the difference between the outstanding principal and the OTS principal accepted) is generally not taxable under Section 41(1) — because the original borrowing (principal) was not a deductible expense. However, the position is more complex for financial companies where the loan was recorded as a liability and the debt waiver results in a credit to the Profit and Loss account. Borrowers should obtain a specific opinion from their Chartered Accountant on the Section 41(1) exposure before finalising the OTS, and factor this into the OTS amount offered to the bank.

Default on OTS Installments — Legal Consequences

Where a borrower accepts an OTS offer and makes the initial payment (typically 20–30% of the OTS amount) but subsequently defaults on an installment, the legal consequences depend entirely on the terms of the OTS deed:

• Bank revokes OTS: Pursuant to the default clause in the OTS deed, the bank issues a notice of revocation, treating the OTS as having failed. All enforcement proceedings suspended during the OTS period are resumed.
• DRT O.A. revived: Where the DRT Original Application was adjourned sine die during the OTS, the bank applies for revival of the O.A. The DRT typically revives the O.A. and resumes proceedings from the stage at which they were suspended. The payments made by the borrower under the OTS are credited towards the outstanding dues, reducing the decreed amount accordingly.
• SARFAESI resumed: SARFAESI enforcement — including the e-auction process — is resumed from where it was suspended. Section 14 applications that were kept in abeyance can be revived before the CMM/DM.
• Limitation preserved: Banks must ensure that the OTS deed contains an express provision preserving the bank’s right to resume enforcement without being barred by limitation — specifically, that the period during which the OTS was in force is excluded from the limitation period for enforcement. Without this provision, a prolonged OTS followed by default could create limitation arguments for the borrower.

DRT Proceedings During OTS Negotiation

The bank’s decision to engage in OTS negotiations does not oblige it to stop or suspend DRT proceedings. In practice, however, banks typically agree to keep DRT hearings on hold once a formal OTS proposal has been received and is under active consideration at the Credit Committee level. This “standstill” is an informal practice — it is not a legal right of the borrower.

The interaction between OTS and DRT becomes legally significant when: (a) the bank issues a Section 13(2) SARFAESI demand notice while an OTS proposal is formally pending — courts have observed that issuing a SARFAESI notice while an OTS is pending creates contradictory positions; (b) the DRT has already passed a decree and the bank is in execution, and the borrower seeks OTS at the Recovery Officer stage — this is permissible and the Recovery Officer can record a compromise under Section 29A of the RDDB Act; and (c) the bank consents to recording the OTS as consent terms before the DRT, which allows the DRT to pass a consent decree that is directly enforceable by the Recovery Officer without a fresh O.A.

OTS and Personal Guarantee Discharge

A recurring issue in OTS negotiations is whether the settlement with the corporate borrower extinguishes the personal guarantee liability of the promoters/directors who signed guarantee deeds. The legal position under the Indian Contract Act and banking practice is clear: an OTS signed only by the corporate borrower does not automatically discharge the personal guarantee unless the OTS deed expressly releases the guarantor.

Banks typically require personal guarantors to join the OTS deed as confirming parties, acknowledging the settlement, agreeing that the waived amount does not discharge their guarantee liability independently, and committing to cooperate in transferring/releasing secured assets. The guarantee release clause should specify that upon receipt of the full OTS amount from the corporate borrower (or from any party), the bank releases the personal guarantors from all liability under the guarantee deeds — effective from the date of full payment.

Promoters who are simultaneously facing IBC Section 95 proceedings as personal guarantors should ensure that the OTS deed expressly records the bank’s agreement to withdraw the Section 95 application upon completion of the OTS payment — failing which the bank may continue the Section 95 proceedings even after OTS completion, which creates complex legal complications.