One-Time Settlement (OTS)

One-Time Settlement (OTS) is a structured mechanism through which banks and financial institutions resolve stressed or non-performing loan accounts by accepting a negotiated lump-sum payment from the borrower in full and final settlement of outstanding dues. In the context of banking, finance and the Indian economy, OTS serves as an important tool for balance sheet clean-up, recovery of bad loans and restoration of credit discipline, particularly in periods of economic stress.
OTS is not a waiver of debt but a pragmatic resolution approach that balances recovery prospects for lenders with the borrower’s capacity to pay, thereby reducing prolonged litigation and asset deterioration.

Concept and Meaning of One-Time Settlement

A One-Time Settlement is an agreement between a lender and a borrower under which the borrower pays a mutually agreed amount, usually lower than the total outstanding dues, in a single instalment or within a short, defined timeframe. Upon receipt of the settlement amount, the lender closes the loan account and relinquishes further recovery claims.
OTS is generally considered for accounts that have become non-performing or are under severe financial stress, where full recovery through normal repayment or legal proceedings is uncertain, time-consuming or economically unviable.

Regulatory Framework and Policy Context

In India, OTS schemes are implemented within the prudential and supervisory framework laid down by the Reserve Bank of India. The central bank does not prescribe a uniform OTS policy but issues broad guidelines on asset classification, provisioning, recovery practices and fair treatment of borrowers.
Banks and financial institutions design their own OTS policies, approved by their boards, specifying eligibility criteria, settlement norms, delegation of powers and safeguards against misuse. These policies are expected to align with regulatory principles of transparency, non-discrimination and sound risk management.

Objectives of One-Time Settlement

The primary objective of OTS is to maximise recovery from stressed assets while minimising time, cost and uncertainty associated with prolonged recovery processes. It is particularly useful where the borrower’s business has weakened but retains some repayment capacity.
Key objectives include:

• Faster recovery of dues compared to legal proceedings
• Reduction in non-performing assets on bank balance sheets
• Release of locked-up capital for productive lending
• Avoidance of further erosion in asset value

By offering a closure mechanism, OTS supports both financial stability and credit flow.

Role in the Banking System

In the banking system, OTS is an important component of stressed asset management. Banks use OTS alongside other recovery channels such as restructuring, insolvency proceedings and enforcement actions.
OTS is commonly applied to:

• Small and medium enterprise loan accounts
• Retail loans under distress
• Legacy non-performing assets with low recovery prospects

For banks, successful OTS resolutions improve asset quality indicators, reduce provisioning burden and free management resources to focus on new business and risk management.

Importance in Finance and Credit Markets

From a broader financial perspective, OTS contributes to improved credit discipline and market confidence. By resolving long-pending stressed accounts, financial institutions can present cleaner balance sheets, which enhances investor confidence and supports capital adequacy.
OTS also complements formal insolvency and recovery frameworks by providing an out-of-court resolution option, particularly for smaller exposures where formal proceedings may be disproportionate in cost and time.

Impact on Borrowers and Economic Activity

For borrowers, OTS offers an opportunity to exit a debt trap and restart economic activity without the burden of unsustainable liabilities. This is especially relevant for small businesses and entrepreneurs affected by economic downturns, structural changes or unforeseen shocks.
By enabling business continuity or orderly exit, OTS can:

• Preserve productive capacity
• Protect employment linked to small enterprises
• Encourage voluntary repayment and cooperation

This borrower-centric outcome contributes positively to local and sectoral economic stability.

Macroeconomic Significance for the Indian Economy

At the macroeconomic level, widespread use of OTS during periods of stress helps stabilise the financial system. High levels of non-performing assets can constrain credit growth, weaken bank profitability and slow economic recovery.
OTS contributes to:

• Faster resolution of stressed assets
• Improved credit transmission
• Strengthening of banking sector resilience
• Support for economic revival during downturns

By cleaning up balance sheets, banks are better positioned to extend fresh credit to productive sectors, supporting overall economic growth.

Safeguards and Governance Considerations

While OTS is a useful recovery tool, it carries risks if not governed properly. Excessive or indiscriminate use of OTS can create moral hazard, encouraging wilful default if borrowers expect future concessions.
To address these concerns, banks incorporate safeguards such as:

• Exclusion of wilful defaulters from eligibility
• Transparent and objective settlement criteria
• Higher authority approvals for large settlements
• Periodic audits and regulatory oversight

These measures ensure that OTS remains a recovery-oriented mechanism rather than a concessionary practice.

Challenges and Criticisms

OTS has faced criticism on grounds of perceived favouritism, revenue sacrifice and impact on credit culture. There are concerns that frequent settlements at significant discounts may undermine repayment discipline and public confidence in the banking system.
Operational challenges include accurate assessment of borrower repayment capacity, valuation of security and ensuring uniform application of policy. Addressing these challenges requires strong governance, documentation and accountability mechanisms.

Relationship with Insolvency and Legal Frameworks

OTS operates alongside legal recovery mechanisms such as insolvency proceedings, debt recovery tribunals and enforcement under security laws. In many cases, OTS is pursued before or parallel to legal action, especially where amicable settlement is feasible.
The availability of multiple resolution options allows banks to choose the most efficient path based on account size, borrower profile and recovery prospects.