One Time Settlement (OTS) is a legal contract between a financial institution (bank) and its borrower to resolve a Non-Performing Loan (NPL) at a reduced amount. This arrangement benefits both parties: the bank reduces its bad loans, and the borrower eliminates associated legal and financial issues. After successfully completing an OTS, the bank improves its balance sheet, and the borrower can better manage their business and finances, becoming eligible for standard banking products and services.
Key Points to Understand About One Time Settlement (OTS)
1. Negotiation Process:
- Initiation: The borrower initiates the negotiation by expressing their intent to settle the debt with a one-time payment. The creditor evaluates the debtor’s financial situation to determine eligibility for an OTS. If both parties agree, negotiations begin to determine the settlement amount. Banks may periodically offer OTS schemes to clean their balance sheets.
- Settlement Amount: The agreed amount is usually less than the total outstanding debt. Banks might offer a reduced amount to encourage immediate payment, with the reduction percentage depending on factors like the debtor’s financial condition, debt age, and collateral valuation.
- Tenor & Payment: The debtor typically makes a token payment of 5-10% in a no-lien account to show commitment and to receive the OTS letter from the bank. OTS timelines can range from 3 months to a year based on transaction size. Once paid, the debt is settled, relieving the debtor of further obligations related to that debt.
2. Debt Resolution:
- OTS is mainly used to resolve NPLs where regular payments have ceased, and the debt has become delinquent. By accepting an OTS, creditors avoid the lengthy and costly debt recovery process, such as legal proceedings or selling the debt to collection agencies.
3. OTS Letter
- This letter from the bank to the borrower outlines the settlement terms, including the amount to be paid, the tenor, and conditions for non-compliance.
4. Options for Borrowers to Pay OTS:
- Borrowing from Family or Friends: This offers flexible repayment terms and potentially lower or no interest but should be approached with clear communication and a written agreement.
- Sale of Assets: Borrowers can liquidate properties or assets to pay off the OTS, especially if they are free from bank charges or can be sold with bank permission.
- Loans for Paying OTS: New financial institutions, under government policies, offer to take over NPA accounts or provide financing for OTS. The new lender pays the previous bank on behalf of the client, closing the OTS and restoring the borrower’s access to standard banking products.
Key Features and Considerations for OTS Financing
1. Key features
- Reduced Settlement Amount: Settle a large debt for less.
- NPA Account Closure: Fully close the NPA account.
- Improved Financial Profile: Enhance financial standing and access to banking products like credit facilities.
- Asset Protection: Prevent properties from being seized under the Sarfaesi Act.
2. Points to Remember:
- Collateral Valuation: Collateral must cover the loan, with lenders typically offering 50% of the collateral’s value in stress financing.
- Costing: OTS loans have high costs and shorter tenors, requiring careful planning for repayment and exit strategies, such as selling assets or refinancing with better terms.
- Repayment Tenor: Stress financiers usually offer 3-5 years, necessitating quick exit planning.
- Loan Assignment to ARCs: Assigning NPA loans to Asset Reconstruction Companies (ARCs) often results in high financing costs, short repayment periods, and restrictions on transferring loans to other financial institutions, leading to ongoing financial burdens.
3. Alternative Financing Options:
- Private Financing: Some companies offer competitive rates and flexible repayment plans, but it’s crucial to verify their credentials and client base.
- NBFCs: RBI-registered NBFCs specializing in NPA financing provide complete NPA account closure, enabling subsequent financing under standard terms. Despite higher costs and shorter tenors, they offer a viable solution for managing business finances post-OTS.
4.Business and Income Management:
- Before approaching a new lender for OTS financing, ensure the repayment capacity through business income, verified by balance sheets, bank transactions, GST payments, or rental income agreements.
Conclusion
One-Time Settlement (OTS) is an effective tool for resolving NPA situations and associated issues. Borrowers should consider OTS if they have a clear plan for addressing their debts, whether through personal borrowing, asset liquidation, or obtaining a loan. Successfully completing an OTS allows borrowers to restart their business and financial life, free from previous NPA account issues.
