One-Time Settlement (OTS) with Banks: The Legal Framework

A one-time settlement is a contract, not an entitlement. No borrower in India can compel a bank or an NBFC to accept less than the contractual dues; an OTS exists only because the lender's board-approved policy permits a compromise and because the sanctioning authority has chosen to exercise that discretion on the facts of a particular account. Everything that matters afterwards — whether the security is released, whether pending SARFAESI or DRT proceedings actually end, and what happens if an instalment is missed — turns on the wording of the sanction letter and nothing else.

As an Advocate practising at the Delhi High Court and Senior Partner at Unified Chambers And Associates, I have negotiated and documented settlements from both sides of the table — for lenders assessing whether to accept a sacrifice, and for borrowers trying to convert a settlement into a clean exit. This note sets out the legal architecture of an OTS and the drafting points that decide whether it works.

Is a borrower entitled to a one-time settlement?

No, and this is the single most misunderstood point in the entire subject.

A compromise settlement is a commercial decision. The Reserve Bank's framework on compromise settlements and technical write-offs, issued in June 2023, requires every regulated entity — commercial banks, co-operative banks, NBFCs and all-India financial institutions — to put in place a board-approved policy governing such settlements. That framework regulates the lender's internal conduct. It does not create a corresponding right in the borrower.

The judicial position is settled in the same direction. In Bijnor Urban Cooperative Bank Ltd v. Meenal Agarwal (Supreme Court of India, 2021), the Court held that a borrower cannot claim the benefit of a one-time settlement scheme as a matter of right, and that a High Court exercising jurisdiction under Article 226 cannot direct a bank or financial institution to sanction an OTS in favour of a particular borrower. The reasoning is straightforward: the lender is dealing with public money and is the party positioned to judge whether accepting a reduced sum is commercially preferable to pursuing full recovery.

What that means in practice is that an OTS is won at the negotiating table, not in court. The limited space that does exist for legal challenge is procedural rather than substantive — where a lender has published a non-discretionary scheme with objective eligibility criteria and has then applied it unequally between similarly placed borrowers, arbitrariness can be argued. The threshold is high and the remedy is usually reconsideration, not a direction to settle.

How do lenders frame their OTS policies?

Understanding the internal machinery makes the negotiation more productive.

Delegated authority. Every settlement involves a "sacrifice" — the difference between the contractual dues and the settlement amount. Policies tie the approving authority to the size of that sacrifice, escalating from a branch or zonal committee to a head-office settlement committee and, for the largest write-downs, to a board-level committee. The RBI framework also requires that the approval come from an authority senior to the one that sanctioned the original credit facility, so that the officials who booked the exposure are not the ones quietly writing it down.

The benchmark. A lender does not price a settlement against what the borrower can afford. It prices it against what it would realise if it litigated — typically the realisable value of the secured assets on a distress-sale basis, discounted to present value, less the estimated cost and time of enforcement, and adjusted for the recoverable net worth of guarantors. A borrower who arrives with an independent valuation and a credible timeline for enforcement is negotiating in the lender's own language.

Typical structure. Most sanctions require an upfront deposit on acceptance, with the balance payable over a defined window, and simple interest on the deferred portion at a stated rate. The structure is a matter of policy, not law, and is therefore negotiable within the policy's outer limits.

Three things that are not the same. An OTS extinguishes the debt for a reduced sum. A restructuring keeps the debt alive on modified terms — longer tenure, revised instalments, a moratorium — with no waiver of principal. A technical write-off is an accounting entry at the lender's end; the borrower's liability survives it entirely and recovery action continues. Borrowers who believe a written-off account is a closed account are frequently surprised by a subsequent recovery notice.

What does an OTS sanction letter actually bind?

The sanction letter is a conditional offer, and the conditionality is deliberate. The lender's obligation to release the security and issue a no-dues certificate does not arise on signature — it arises on performance in full, in time, and in the manner specified. In contract terms it is an accord that is satisfied only on payment.

Six clauses in a standard letter deserve line-by-line attention:

1. Acceptance window. The offer usually lapses if not accepted, with the upfront deposit paid, within a short period — often seven to fifteen days.

2. Time is of the essence. Where this appears, the payment dates are not indicative. They are conditions.

3. Revocation on default. The clause that provides for the concession to stand withdrawn and the original dues to revive.

4. Appropriation. How amounts already received are treated if the settlement collapses, and whether they are refundable.

5. Reservation of rights. Language preserving the lender's right to continue or revive proceedings, and its rights against guarantors and third-party security providers.

6. No admission. A statement that the settlement is without prejudice and is not an admission of the correctness of any figure — which cuts both ways, and matters if the settlement fails and the account statement is later disputed.

What happens if you default on an OTS instalment?

The original debt revives. That is the whole point of the drafting.

On default, the concession is withdrawn, the account reverts to the full contractual liability with interest as originally agreed, and the amounts already paid are appropriated against that liability rather than refunded. The borrower is left worse off than before in one specific respect: money has left the business, the enforcement clock has run, and any standstill on SARFAESI enforcement falls away.

Courts are generally unwilling to rescue a defaulted settlement. Extending the payment window means rewriting a commercial bargain that the lender was never obliged to offer, and after the Bijnor judgment the reluctance is principled rather than merely discretionary. There are instances of limited indulgence — usually where the delay is short, the shortfall is small, and the lender's own conduct contributed — but no borrower should plan around that possibility.

The protection has to be built in beforehand. A negotiated cure period of seven to fifteen days, with additional interest payable on the delayed instalment instead of automatic revocation, is the most valuable single amendment a borrower can obtain.

How does an OTS interact with pending SARFAESI action?

This is where sequencing goes wrong most often.

A settlement is by definition a payment of less than the full dues. It therefore does not engage the borrower's statutory right of redemption under Section 13(8) of the SARFAESI Act, which operates only on tender of the entire outstanding together with all costs, charges and expenses. Since the 2016 amendment, that right is also truncated in time: it is available only until publication of the notice for public auction or for inviting quotations, tender or private treaty. Once the auction notice is out, the statutory route is largely closed and the borrower depends entirely on the lender's agreement.

Three consequences follow. First, an OTS proposal does not by itself suspend a Section 13(4) enforcement — the letter must contain an express standstill covering possession, valuation, auction notices and sale. Second, where symbolic or physical possession has already been taken, the letter must state when and how possession is restored, and who bears the custody and security costs in the interim. Third, if an application under Section 14 is pending before the Chief Metropolitan Magistrate or the District Magistrate, the lender should agree in writing to keep it in abeyance rather than merely saying so orally at a meeting.

What happens to a pending DRT case?

A pending Original Application — the lender's recovery application under Section 19 of the Recovery of Debts and Bankruptcy Act 1993 — does not lapse because a settlement has been sanctioned. It has to be disposed of, and the disposal has to be recorded.

The practical sequence before the Debt Recovery Tribunal is: the parties report the settlement and seek adjournment or that the matter be kept in abeyance while the schedule runs; on full payment a joint memo is filed and the OA is disposed of as settled. If a Securitisation Application under Section 17 of the SARFAESI Act filed by the borrower is also pending, its withdrawal should be tied to the lender's performance, not to the borrower's payment alone.

Where a Recovery Certificate has already issued, more is needed. The certificate must be satisfied and the satisfaction recorded before the Recovery Officer, attachments over movable and immovable property must be formally vacated, garnishee orders against bank accounts and debtors must be released, and any proclamation of sale must be withdrawn. A no-dues certificate from the lender does not, on its own, lift an attachment ordered by the Recovery Officer. If an appeal is pending before the DRAT and a pre-deposit has been made, the settlement should record how that deposit is treated — whether adjusted against the settlement amount or refunded.

Can you settle after insolvency proceedings have begun?

Yes, but the mechanism changes completely, and a bilateral deal with one creditor is no longer sufficient.

Before an application under Section 7, 9 or 10 is admitted, the applicant can seek withdrawal and the Adjudicating Authority may permit it. Once the corporate insolvency resolution process is admitted, the proceeding is one in rem, and withdrawal is governed by Section 12A of the Insolvency and Bankruptcy Code: an application in Form FA, routed through the interim resolution professional or resolution professional, approved by ninety per cent of the voting share of the committee of creditors. The Supreme Court upheld the constitutional validity of that architecture in Swiss Ribbons Pvt Ltd v. Union of India (Supreme Court of India, 2019). Settling with the applicant creditor alone achieves nothing if the committee does not vote for withdrawal.

Two further constraints matter. The moratorium under Section 14 prohibits the corporate debtor from transferring, encumbering or disposing of its assets, so the settlement funds ordinarily have to come from promoters or a third party rather than from the company itself. And enforcement under SARFAESI is barred for the duration of the moratorium, which removes the lender's fastest lever and changes the negotiating balance.

What about guarantors and cheque-bounce complaints?

Settling the principal debt does not automatically clear the surrounding liabilities, and the default position under the Indian Contract Act 1872 cuts against the lender.

Under Section 134, a release of the principal debtor discharges the surety. Under Section 135, a composition with, or a promise to give time to, or not to sue the principal debtor discharges the surety unless the surety assents to it. This is precisely why lenders insist that every guarantor sign the settlement letter as a consenting party. From the borrower's side the mirror-image point applies: a guarantor who wants a clean exit must ensure the letter expressly releases the guarantee, and provides for return of the executed deed of guarantee and any collateral the guarantor furnished personally.

Criminal complaints run on their own track. A pending complaint under Section 138 of the Negotiable Instruments Act does not abate because a civil settlement has been reached. The offence is compoundable under Section 147 of that Act, but compounding requires the complainant's consent, recorded before the Magistrate. The settlement letter must therefore commit the lender to consenting to compounding on full payment, and must provide for the return of all security cheques, post-dated cheques and undated signed instruments — which, if left in the lender's file, are the raw material for a fresh complaint years later.

Closure checklist: what to obtain on full payment

The settlement is not complete when the last instalment clears. It is complete when the following are in hand:

1. No-dues certificate in terms of "full and final satisfaction", dated after the final payment.

2. Original title deeds returned against a written, itemised acknowledgement.

3. Deed of release or reconveyance, and where the security was an equitable mortgage, cancellation of the memorandum of deposit of title deeds and the corresponding entry with the sub-registrar or in the revenue records.

4. Satisfaction of charge with the Registrar of Companies for company borrowers — Form CHG-4 under Section 82 of the Companies Act 2013, ordinarily within thirty days of satisfaction.

5. Satisfaction of the security interest recorded with CERSAI, which the secured creditor is required to report under Chapter IV of the SARFAESI Act.

6. Withdrawal of SARFAESI notices, vacation of possession, and withdrawal of any Section 14 application.

7. Disposal of the DRT proceedings, satisfaction of any Recovery Certificate, and formal vacation of attachments and garnishee orders.

8. Consent to compounding of Section 138 complaints, and withdrawal of any other proceedings.

9. Return of cheques and unencumbered collateral — security cheques, fixed deposits held as margin, lien-marked balances, share certificates, blank signed documents.

10. Release of guarantees and return of guarantee deeds.

11. Credit bureau reporting — written confirmation of the status that will be reported to credit information companies and the date on which it will be updated.

On the last point, borrowers should go in with clear expectations. A settled account is ordinarily reported as "settled" rather than "closed", and that entry follows the borrower. The RBI framework also contemplates a cooling period before the same lender takes fresh exposure to a borrower who has availed a compromise settlement. Neither consequence is a reason to avoid a settlement; both are reasons to price it accurately against the alternative.

Drafting points that protect the borrower

• **Make the figure all-inclusive.** The settlement amount should be expressed as inclusive of interest to the date of final payment, legal costs, valuation fees, possession and custody charges, insurance and incidental expenses. Residual language such as "plus costs as applicable" defeats the purpose of settling.
• **Fix the schedule precisely.** Exact dates, exact amounts, the mode of payment and the designated account. Ambiguity about a value date has ended settlements.
• **Negotiate a cure period.** Additional interest on a delayed instalment is a far better outcome than automatic revival.
• **State the interest on the deferred portion.** Rate, simple or compound, and whether it is included in or additional to the headline figure.
• **Insist on a standstill.** Express suspension of all enforcement and recovery steps while the schedule is being complied with.
• **Deal with appropriation.** If the settlement collapses, agree that payments already made are appropriated first against principal.
• **Put outer time limits on the lender's deliverables.** "Within thirty days of the final payment" is enforceable; "in due course" is not.
• **Verify authority.** Confirm that the officer signing holds delegated authority for the sacrifice involved, and that the sanction is minuted. A settlement granted beyond the delegated authority is a weak instrument.
• **Take tax advice before signing.** Waiver of a liability can have income-tax consequences, and the treatment of waived interest previously claimed as a deduction differs from the treatment of waived principal. This should be modelled before the settlement figure is agreed, not after.

A worked sequence, from proposal to closure

Stage 1 — Reconstruct the account. Obtain the full statement of account and the lender's computation of dues. Identify wrongly applied interest, penal charges and unsanctioned levies. The settlement is negotiated against this figure, so it should be tested first.

Stage 2 — Value the security independently. The lender's benchmark is realisable value. A borrower without a valuation is negotiating blind.

Stage 3 — Submit a written proposal. State the amount, the source of funds, the upfront deposit and the schedule. Where funds come from a third party or a property sale, say so and attach evidence — the credibility of the source of payment is what moves a proposal through the committee.

Stage 4 — Negotiate the letter, not just the number. Cure period, standstill, deliverables, guarantor position, cheque return, bureau reporting.

Stage 5 — Pay strictly to schedule and retain proof of every remittance with the reference number and value date.

Stage 6 — Enforce the closure checklist in writing, item by item, with dated reminders.

Unified Chambers And Associates advises borrowers and lending institutions on compromise settlements alongside contested proceedings, as part of its NPA resolution and debt recovery practice. Institutions framing or applying settlement policies may find the institutional counsel page relevant, and the legal glossary explains the recurring terminology.

This article is general information on the law and procedure relating to compromise settlements. It is not legal advice, and the correct course in any given account depends on its documents and facts. Queries may be directed through the contact page.