One Time Settlement (OTS) with Banks in India Complete Legal Guide 2026
Some borrowers feel that once the account becomes NPA, the bank will quote a discount.
Some others feel that by sending an OTS proposal they can halt possession / auction/ Debt Recovery Tribunal proceedings. Yet others send in a settlement proposal without bothering to find out if the funds can be arranged in the time specified.
Each scenario is based on an incorrect assumption that can land you in trouble.
OTS Meaning.
In banking, a one time settlement (OTS) is an agreement with the bank to compromise on your liabilities. It means that the bank will accept an agreed amount in full and final settlement of its claims, possibly foregoing the balance which might otherwise have been recovered. As per RBI’s extant instructions, a compromise settlement refers to a settlement of accounts entered into by a regulated entity and the borrower by way of a negotiation for a full and final settlement of the claims (whether on account of principal or interest or both) of the regulated entity against the borrower/partner in cash, which involves sacrifice by the regulated entity and, therefore, corresponds to a waiver to that extent.”
OTS v/s Loan Restructuring:
OTS is neither loan restructuring under the extant directions nor an accounting write-off of a loan nor a legal order reducing the liability to a lower amount.
Entitlement to OTS:
OTS is therefore not something that automatically accrues to you when your accounts become NPAs.
In a recent judgment, the Supreme Court has observed that the borrower has no entitlement, as of right, to insist that the bank concede an OTS because he desires it. The commercial decision on whether or not to grant an OTS lies with the bank itself, though it must exercise that discretion in accordance with its policy and the law.
Importance of OTS:
In fact far from rendering OTS irrelevant, the very reason that makes repossession action a possibility opens up the possibility of OTS. If you are a viable business facing genuine temporary financial stress, an OTS can sometimes enable you to put behind you a long dragged out recovery battle, minimize uncertainty, free charged assets once compliance is demonstrated and save you the costs of years of litigation/trials.
Preparation is Crucial for success:
Things like the amount you propose to settle at, funds you have at hand, value of security, pending SARFAESI action, DRT case(s), guarantor exposure and bank policy play an important role.
OTS in Light of Pending Recovery Proceedings:
BK Singh Advocate help clients to review their OTS proposals along with SARFAESI, DRT and bank-recovery proceedings so that clients give a settlement offer keeping in view the actual facts of legal position.
Why One Time Settlement with Banks Matters in India in 2026
Loan stress seldom impacts only the bank.
The business owner worries about working capital, employees, suppliers, collateral property and family guarantees when faced with default. The residential borrower faces the home they live in. Guarantors find their personal assets at risk of recovery.
Enforcement has started, increasing the heat.
The bank sends a Section 13(2) demand notice under SARFAESI. Followed by action under Section 13(4). Section 14 proceedings for assistance with possession is initiated. There could even be an O.A. pending before DRT.
This is usually when OTS conversations begin.
Compromise settlement is expressly mentioned in RBI’s guidelines as a tool for resolution of stressed assets. All Regulated Entities are required to have Board approved policies on compromise settlements which include the parameters for settling such accounts, the extent of sacrifice allowed and the methodology for considering the current realisable value of the security available.
Notice that last part.
“A loan of ₹2 crore will be settled at ₹80 lakh.” thinks the borrower.
The bank will not look at ₹2 crore and ₹80 lakh.
The bank will look at the realisable value of the property upon which the loan is mortgaged, estimated timeline for recovery, litigation if any, guarantees, previous repayment history, cost of enforcement and what it can realistically hope to recover if it went to trial.
OTS discussions are therefore a commercial discussion bounded by a regulatory structure.
Its not you asking the bank to “please please please” give you a haircut.
OTS discussions may even have DRT Advocates analysing the stage of recovery & reviewing security documents prior to a settlement offer being formulated, especially where the borrower is already being proceeded against for possession, auction or RTC.
Quick Facts About Bank OTS
- RBI guidelines stipulate that the entity entering into a compromise settlement should treat it as a negotiated agreement for a full and final settlement of the lender's claims in cash, which may entail a sacrifice of part of the amount due.
- Guidelines mandate that banks and other covered regulated entities should have Board approved policies on compromise settlements.
- OTS is not a matter of right of the borrower just because the account is stressed/NPA.
- Framework requires RBI that the approval authority for the settlement should not be lower than one level above the authority that is empowered to sanction the original exposure.
- If payment under a compromise settlement is to be made over a period exceeding 3 months, it will be treated as a restructuring (for prudential purposes) under the RBI framework.
- For non-farm exposures, RBI mandates a cooling period of minimum 12 months before fresh exposure can be considered after a compromise settlement. However lender's policy may mandate a longer cooling period.
- If recovery litigation is already pending before a judicial forum, framework of RBI mandates that such settlement be subject to obtaining an appropriate consent decree from such forum.
What Is a One Time Settlement with a Bank?
OTS stands for One Time Settlement. It is a compromise where the lender agrees to accept a certain amount in order to fully and finally settle its claims against the borrower on the terms agreed.
This amount is usually less than what is currently owed.
It is sometimes referred to loosely as a “waiver”.
Technically, legally and commercially speaking though, an OTS is different from a waiver of debt. When granting an OTS, the lender thinks about whether it wants to recover less or pursue its full remedies.
Per RBI's instructions, the general tenor of the compromise settlement policy should be to endeavour to maximise the quantum of possible recovery from a distressed account at the lowest cost and in the best interests of the regulated entity. Hence the importance of collateral value.
If a bank is owed ₹1.5 crores and has decent collateral against this loan which can fetch almost that much via an auction sale, it will be hard for a borrower offering ₹40 lakhs to make a case why the bank should accept such a big haircut.
But if the property is in dispute, or difficult to sell, or substantially depreciated, or already encumbered with senior claims, or would produce far lower realisable value after years of litigation in court, then the bank will likely view the proposal differently.
Every situation is unique. But remember that OTS is a commercial decision. Proper documentation only helps lend credibility to the proposal.
Is OTS a Legal Right of the Borrower?
There is no general right to compel a bank to accept an OTS just because a borrower makes a proposal.
This was articulated by the Supreme Court in Bijnor Urban Cooperative Bank Ltd. v. Meenal Agarwal. A writ of mandamus cannot normally be issued mandating a bank to provide a borrower the benefit of OTS as if it were an enforceable right of settlement.
It flows from the commercial nature of lending.
Banks are handling the money of depositors and the public. The lender has to weigh up whether settlement is a better financial option than continuing with recovery.
Financial difficulty suffered by a borrower can be real and serious and not give rise to a legal obligation on the part of the bank to write off the debt.
On the other hand the lender must act in accordance with its policy and relevant regulatory guidelines.
If there is a specific settlement scheme in place and the application is duly considered, issues as to fairness, compliance with policy or decision-making may be available on the facts. However, the commercial decision as to the amount of settlement cannot ordinarily be replaced by a court just because the borrower thinks the figure offered is reasonable.
BK Singh Advocate has generally advised borrowers to view OTS applications as a business decision they should approach from a commercial perspective with a structured proposal supported by evidence, rather than as a demand made with legal entitlement assumed as a given.
What RBI Rules Apply to One Time Settlement in 2026?
RBI issued Framework for Compromise Settlements and Technical Write-offs on 8 June 2023.
This framework covers regulated entities under RBI’s supervision. This includes all commercial banks, co-operative banks, All India Financial Institutions and NBFCs to which this circular applies. Regulated entities and borrowers have been directed by RBI to refer to this framework when seeking information on settlements.
Board Approval OTS Policy
Covered regulated entities are required to have a policy approved by their Board of Directors that addresses compromise settlements.
That policy would specify the procedure to be adopted. It can stipulate various preconditions such as the minimum ageing of the exposure, deterioration in collateral value etc.
Thus individual banks can have varying internal settlement standards so long as they remain within the broader RBI guidelines.
Permissible Sacrifice
One of the points addressed by the bank’s internal policy would be the extent to the which the bank can sacrifice for various categories of exposure.
In determining the settlement amount, the lender should also consider prudently the current realisable value of the collateral that is available.
This is why an updated property valuation or security assessment is an important component of OTS discussions.
Approval Authority
Finally, RBI mandates that authority to approve a compromise settlement should be at least one level higher than the authority who can sanction the original exposure.
In other words, a bank official who was involved in sanctioning that loan cannot approve the OTS for that account.
This is why branch managers may be able to negotiate an OTS but not have final approval authority to grant one. Borrowers should never conflate negotiation with sanction.
Board Level Review
One final note on OTS is that these settlements are not exempt from internal scrutiny.
As part of the RBI framework, all banks must include reporting on the number and amounts of compromise settlements (amongst other categories).
An OTS should never be viewed as some informal agreement with a bank recovery officer.
What Should an OTS Sanction Letter Contain?
OTS sanction or settlement letter issues:
OTS sanction or settlement letter can turn out to be the single most crucial document throughout the entire recovery litigation.
Read it before making the first payment under it.
OTS Important Terms:
OTS Settlement Amount
Ensure the amount is exact.
OTS Upfront amount
Certain settlements oblige you to pay an upfront amount.
Confirm if an earlier payment made is adjusted against this amount.
OTS Instalments
Ensure all amounts and due dates are exact.
OTS Final date
Time is often of the commercial essence.
Never assume that a request to extend the last date will be unconditionally granted.
OTS Interest and Charges
Ensure you know if interest accrues during the settlement period and what happens if a payment is delayed.
OTS Default
This provision can make or break you.
An OTS may provide that if the final payment is not made by the due date, the concession is revoked and the bank may reinstate recovery for a higher contractual outstanding, net of amounts paid.
The exact terms will depend on the wording of the letter.
OTS Securities
The letter should clearly define when mortgage documents, guarantees or charges will be returned.
OTS Proceedings
The OTS should mention SARFAESI proceedings, DRT suits, Recovery Officer proceedings and any other recovery lawsuits in force.
OTS No-Dues certificate or Closure
Ensure you know what kind of no-dues or closure order the bank will provide on completion of all terms.
OTS Credit Reporting
Never assume that OTS agreements allow removal of past default records.
The OTS agreement must be reviewed along with the relevant credit reporting guidelines. Also DRT Advocates should review the settlement letter before it is agreed to, especially where the default clause would otherwise significantly resurrect liabilities.
What Documents Are Needed for an OTS Proposal?
Ideally, an OTS file should comprise financial as well as legal documents.
Loan Documents
Retain sanction letters; facility agreement; security / guarantee documents; mortgage deeds available with borrower.
Bank Statements
Obtain a recent statement where outstanding as claimed is reflected. If there is a dispute in calculation, separate the disputed entries.
NPA & Recovery Letters
Gather copy of recall notice; Section 13(2) notice; reply received under Section 13(3A), if any; possession notice; auction notice; bank letters.
DRT Documents
If proceeding is initiated or pending, retain copy of Original Application; written statement; DRT orders passed; Recovery Certificate issued; Recovery Officer notices.
Financial Documents
Businesses may be required to provide audited financials; GST returns; cash- flow statements; most recent Balance Sheet; receivables; tax returns; business discontinuance / stress documentation.
Security Information
Maintain updated property / asset information. If relying on valuation, provide a reasonable valuation and not just an arbitrary figure.
Proof of Source of Funds
If funds are being contributed by an investor, property sale proceeds or a family member, provide relevant proof if asked to.
Settlement Offer
Keep a copy of every offer made to the bank.
Bank Replies
Don’t lose emails / sanction letters / committee meetings notes. A chronology dated by both parties can eliminate arguments from the other side at a later stage what was agreed upon.
When Should You Consult a Lawyer for Bank OTS?
Lawyer's review becomes handy where:
- SARFAESI notice is served;
- possession has been taken over;
- auction has been scheduled;
- DRT proceeding has been initiated;
- Recovery Certificate has been passed;
- assets of guarantor are sought to be attached;
- multiple lenders are involved;
- OTS was rejected earlier by bank;
- OTS being proposed involves big balloon payment upfront;
- OTS involves strict clause on default;
- documents giving title are required to be handed over;
- borrower falls in category of wilful defaulter;
- there are parallel criminal proceedings as well;
- auction purchaser is the party;
- extension of time in OTS is sought.
BK Singh Advocate can review the legal proceedings along with the financial package being proposed so that the terms of settlement do not unwittingly override a defence available to you or a remedy provided under statute.
How DRT Advocates Can Help with Bank OTS
DRT Advocates can assist you in matters related to Banking Recovery including settlement SARFAESI DRT and DRAT proceedings.
Services include:
- review of loan and security file history;
- verification of current bank demand;
- analysis of SARFAESI notices issued;
- review of DRT proceedings initiated;
- drafting of an OTS proposal;
- preparation of settlement representations;
- analysis of the security/recovery situation;
- review of OTS sanction letter from the bank;
- verification of default/revival conditions;
- resolution of consent terms within existing DRT proceedings;
- review and release of title-documents; and
- management of associated litigation if necessary.
An attorney cannot promise you that a bank will agree to accept a certain amount to settle your account.
That is a commercial decision for the bank and is governed by its internal policies.
However, legal guidance can help explain your options, uncover hidden pitfalls and ensure that an accepted settlement is executed correctly.
Frequently Asked Questions
1. What is One Time Settlement with a bank?
OTS refers to a compromise wherein the bank agrees to accept a certain amount in full settlement of its claims against the borrower.
The agreed amount can include a concession from the outstanding total amount otherwise payable. RBI mandates that compromise settlements are carried out in accordance with a lender’s Board-approved policy.
2. Is OTS a legal right of every borrower?
No. In multiple rulings, the Supreme Court has held that a borrower cannot ordinarily insist on OTS as a matter of enforceable right or demand that the court direct a bank to sanction a settlement because he or she applies for it.
3. Does RBI fix a standard OTS discount percentage?
No. RBI has not prescribed a universal discount that applies in every case such as 30%, 40% or 50%.
The overall settlement amount may depend on factors such as the lender’s Board approved policy, value of security, expected recovery from liquidation and circumstances of the case.
4. Can a bank refuse an OTS proposal?
Yes. A bank can reject an OTS proposal if it does not meet the bank’s policies or the lender considers ordinary recovery to be commercially a better option.
A rejection of a proposal will not automatically mean that the bank has acted illegally.
5. Does an OTS proposal stop SARFAESI action?
No. Just making an OTS proposal will not automatically stay proceedings to take possession or auction.
Possession or auction can proceed while the settlement is being considered. Recovery action can continue until the settlement is accepted by the bank or an order from the court stays such recovery.
6. Can OTS be considered during pending DRT proceedings?
Yes. RBI’s settlement framework anticipates that compromise can occur even if the lender or borrower have already started judicial proceedings to recover the money, but requires obtaining the consent decree of the court hearing those cases.
7. Can OTS be negotiated after a Recovery Certificate has been issued?
Potentially yes. This will depend on the bank agreeing to OTS despite the Recovery Certificate.
Ideally the settlement agreement should make specific mention of the RC as well as any pending proceedings by the Recovery Officer so it is clear what legal consequences are waived by the borrower after completing full payment.
8. Can OTS be negotiated after receiving notice for auction?
Yes, you can still send in a proposal. Just because you send in a proposal does not automatically stop the auction.
Borrowers should assess their options to quickly obtain a legal stay if needed.
9. What if I don’t pay the bank after agreeing to OTS?
If the borrower does not pay on an OTS as agreed, the lender may have the right to cancel the agreed concession and continue recovery action against the borrower.
The exact consequences will be subject to the terms in the sanction letter, as well as the relevant laws under which the loan was agreed. The bank will generally have to account for money already paid by the borrower before recovering the remainder.
10. Can the OTS payment timeframe be extended?
The bank may allow more time to make the payment if higher authorities agree. This will depend on the policies of the bank as well as facts of the case.
The borrower should not expect this as an automatic right. If more time is needed the borrower should get any extensions in writing.
11. Can a wilful defaulter get OTS?
Yes. RBI explicitly permits banks to enter into compromise settlement of loans including those from accounts classified as wilful defaulters.
Settlement subject to internal Board approval by the lender and compliance with other applicable conditions.
Entering into OTS does not automatically stop other actions against a wilful defaulter such as declaring them ineligible for future loans under RBI regulations.
12. Can I do an OTS on a fraud loan?
Yes. Banks can enter into a compromise under OTS on loans which are classified as fraud by RBI’s guidelines.
However, the compromise is without prejudice to any pending criminal proceedings against the borrower.
Board approval is needed to accept OTS proposals on fraud loans.
13. Does OTS mean that bank has written off my loan?
No. It is possible that a compromise settlement will require the borrower to actually waive a portion of the claim against them once they comply with the settlement terms.
Technical write-off is a separate accounting process performed by banks internally and does not necessarily remove borrower liability.
14. Will OTS affect my ability to borrow in the future?
OTS can affect your ability to obtain new loans or borrowal facilities from that bank in the future.
RBI mandates lenders to observe a cooling period from when a settlement is granted until extending new loans to the same borrower. For non-agricultural loans this period is usually 12 months but banks can impose longer periods.
15. Does OTS remove negative history from my credit record?
Borrowers should not expect an OTS to remove negative history from their credit records.
The past default and settlement will likely still be reported to credit bureaus and considered by future lenders when deciding whether to lend.
No lawyer or agent should guarantee that completing an OTS will immediately give you a “clean” credit file.
16. How long does the bank have to return original property documents after settlement?
Banks must return original documents relating to movable or immovable property within 30 days if the loan was a personal loan covered by RBI’s directions on responsible lending.
This includes registered charges which must be removed from the property’s title records too.
If the bank delays returning original documents without reasonable cause, RBI allows borrowers to recover ₹5,000 per day from the bank as compensation until documents are returned.
17. Can a guarantor negotiate an OTS with the bank independently?
Potentially yes. Whether a bank will enter into OTS negotiation with a guarantor will depend on the terms of the guarantee and overall recovery situation.
Ideally the OTS settlement should specify whether it only releases the nominated guarantor or whether it settles the entire account.
18. Can I combine multiple loans from different banks in OTS?
You can potentially combine multiple bank loans into a single OTS. The lender must agree to this and the sanction should list all facilities covered by the OTS.
Borrowers should be careful to specifically mention all loans, guarantees and security so that no facility is inadvertently left out of the OTS.
19. What documentation will help support my OTS proposal?
Banks will usually consider recent bank statements, loan sanction documentation, SARFAESI notices received, information about the security provided, financial statements from the business, proof of any financial distress and documentation about the proposed source of funds for making the OTS payment.
Well documented realistic proposals are more likely to receive consideration than requests for large waivers with little supporting information.
20. Who can help with OTS if SARFAESI/DRT proceedings have started?
An experienced lawyer can help you understand how a potential settlement would interact with the SARFAESI or DRT proceedings already initiated by the bank.
BK Singh Advocate and DRT Advocates can help with OTS proposals, SARFAESI disputes, DRT cases, settlement agreements and related debt-recovery matters depending on your facts and location.
Final Thoughts
One Time Settlement (“OTS”) with banks can be a workable solution for a stressed borrower. However, it is not a right and it is not a card that can be played to automatically get a discount.
Even though RBI has accepted compromise settlements as a resolution option:
the value of security, the expected recovery, legal proceedings already initiated, borrowers capacity to pay etc. all need to be considered.
If cases are already filed in DRT or any other forum, ensure that the settlement is acknowledged in the proceedings. In fact, RBI has clearly asked for appropriate consents to be recorded for cases in courts/tribunals.
BK Singh Advocate and DRT Advocates have helped borrowers and businesses review settlements and work out favourable solutions. DRT Advocates has experience in connected SARFAESI, DRT and DRAT matters throughout Delhi, New Delhi, Ghaziabad, Noida, Greater Noida, Gurugram, Faridabad and elsewhere in India depending on the forum and facts.
