Every company or individual takes a loan in their life journey. Companies take loans for working capital requirements, for developing infrastructure & products like bank guarantees and LC to meet the business standards of clients. While individual takes loans to fulfill their requirement of child education & marriage, buying house properties, and renovation to buy their dream cars.
Loans play a crucial role in a company’s growth and in fulfilling an individual’s requirements. So, their repayment is also crucial to maintain business growth and to avail loan facilities in the future.
A good loan repayment ensures high credit availability with lower interest rates. On the other hand, a bad repayment not only creates legal issues for borrowers but also discourages other lenders from issuing new loans.
So, in the case of non-repayment of any loan, companies & individuals have an option to close the account under the one-time settlement scheme, or OTS.
What is One-Time Settlement or OTS in banking?
One-Time Settlement or OTS is a scheme offered by banks to their NPA account borrowers who fail to pay their loans on time. Through OTS, the bank offers to close an NPA account at a reduced price, which encourages borrowers to get rid of their NPA liability in a single shot, whereas banks can collect a good part of the loan without long legal litigations.
But is One-Time Settlement, or OTS, a good idea for a borrower to close the loan? Or what are the advantages & disadvantages of closing a loan under OTS?
Advantages of One-Time Settlement (OTS)
- Saving a good amount of money: Borrowers can save a lot of money in OTS, as banks waive off their penal interest & legal charges and offer closure of the loan at a reduced price. In this way, a borrower can save a lot of money in the process.
- Closure of NPA Loan: OTS encourages borrowers to close their NPA accounts. Earlier, it seemed to be hard to close due to the high loan outstanding.
- Saving precious property: By closing the NPA account under the OTS, borrowers can save their hard-earned properties, which can be auctioned by the banks to recover the loan.
- Relief from legal litigations: The borrower can get relief & freedom from all legal litigations initiated by the bank to recover the loan.
- Focus on business: After closing the loan, a borrower can only focus on the business growth without the worry of the bank’s legal proceedings and recovery agents.
Disadvantages of One-Time Settlement (OTS)
- Negative impact on credit score: OTS can negatively impact the credit report and significantly affect/lower the credit score, as it is marked as settled in the Cibil report.
- Facing issues in Future Loans: The borrower may face difficulties raising loans in the future from banks & NBFCs. A new lender does not prefer a client who has settled loans in his past. Moreover, financing the borrower with a low credit score is against their lending policy.
- Slow business growth: Without the availability of working capital loans, the business can move at a slower pace. Moreover, few businesses, like contractors & importers, require LC & BG facilities, which can only be provided by banks.
- High-cost loans: After OTS, there are chances that the borrowers can get new loans at a high cost. Means, high rate of interest & high processing fee applicable on the loan.
- Strict loan features: Apart from the high-cost loan, new lenders can offer lower repayment tenors that increase the EMI amount, and only a term loan can be offered.
- Lower loan amounts: New financing lenders may offer low/small loan amounts compared to the standard financing, which may be insufficient to fulfill the demand.
