By S&S Co. Advocates & Solicitors · Published 24 September 2026 · Informational content, not legal advice — see our disclaimer
When a Loan Becomes Eligible for an OTS Discussion
A one-time settlement becomes a realistic option once an account has been classified as a Non-Performing Asset — typically once principal or interest remains overdue beyond 90 days — and the lender's own internal recovery-probability assessment has dropped. RBI's Framework for Compromise Settlements and Technical Write-offs, dated 8 June 2023, requires every regulated lender to have a Board-approved OTS policy governing how such settlements are structured and approved, rather than leaving each case to ad hoc, informal negotiation.
This matters for a borrower's expectations at the outset: an OTS is a matter of the lender's commercial discretion, exercised within its own Board-approved policy, not something a borrower can demand as a matter of right. Courts have confirmed this — a borrower cannot compel a bank to offer a settlement merely because the account is in default.
What a Bank Actually Considers
Within that policy framework, banks are expected to weigh the borrower's genuine financial capacity and repayment history in structuring any offer — a settlement is meant to recover the best realistically achievable value for the lender, not to reward strategic default. In practice, banks often intensify their NPA resolution efforts ahead of financial year-end (broadly October to March), which can be a practical window for a genuinely distressed borrower to open a settlement conversation.
Because the decision is discretionary, a borrower's approach matters: a credible, well-documented picture of financial hardship, together with a realistic settlement figure, is far more likely to succeed than an opening position pitched purely to minimise payment regardless of capacity to pay more.
Getting the Settlement Properly Documented
Borrowers should insist that any settlement terms discussed verbally or over the phone are followed up with a written offer on the bank's own letterhead, and should not proceed to pay based on an informal assurance alone. Once terms are agreed, a formal, signed Settlement Letter should be obtained before any payment is made, and the borrower should specifically confirm how the account will subsequently be reported to credit bureaus — as 'settled', rather than 'written off' or left in an ambiguous status that could continue to harm the borrower's credit profile.
These documentation steps are not mere formalities. Disputes over what was actually agreed are far harder to resolve after the fact if the borrower relied only on a verbal understanding.
What an OTS Does Not Resolve
A critical point borrowers often overlook: settling the outstanding debt through an OTS does not, by itself, terminate any independent criminal exposure arising from the same underlying facts. If the default also involved a dishonoured cheque attracting Section 138 of the Negotiable Instruments Act, or an allegation of fraud, those proceedings continue on their own track unless they are separately compounded or withdrawn through the specific procedure the law provides for that purpose.
A borrower negotiating an OTS to resolve the civil debt should therefore also address, as a distinct and separate step, any parallel cheque-bounce or fraud proceedings connected to the same transaction — settling one does not automatically close the other.
Frequently Asked Questions
Can a borrower demand a one-time settlement from their bank as a matter of right?
No. Courts have held that an OTS is a matter of the lender's commercial discretion, exercised under its own RBI-mandated, Board-approved compromise-settlement policy. A borrower cannot compel a bank to offer a settlement simply because the loan account has become an NPA.
When does a loan typically become eligible for OTS discussions?
Generally once it has been classified as a Non-Performing Asset — usually once overdue beyond 90 days — and the bank's own recovery-probability assessment has declined, making a negotiated settlement commercially attractive relative to continued recovery efforts.
Does paying an OTS amount end a related Section 138 cheque-bounce case?
Not automatically. Settling the underlying debt through an OTS does not by itself terminate independent criminal exposure — a connected Section 138 Negotiable Instruments Act complaint or fraud allegation continues separately unless it is specifically compounded or withdrawn through its own procedure.
What should a borrower insist on before making an OTS payment?
A written settlement offer on the bank's letterhead, a formally signed Settlement Letter setting out the agreed terms, and written confirmation of how the account will be reported to credit bureaus (ideally as 'settled') — rather than relying on a verbal assurance.
References & Further Reading
This article references the following statutory provisions. Readers should always verify current rules, fees and timelines against the applicable statute and rules as amended, since these are revised from time to time.
- RBI Framework for Compromise Settlements and Technical Write-offs, dated 8 June 2023.
- RBI Master Direction on Income Recognition, Asset Classification and Provisioning (IRACP) norms, as amended, for the current NPA classification threshold.
- Negotiable Instruments Act, 1881, Section 138, and its compounding provisions, for cheque-bounce exposure connected to a settled debt.