All about One Time Settlement (OTS)              

One time Settlement is a legal contract between a financial institution (bank) & its borrower to settle down a Non-Performing Loan (NPL) at a reduced price which is beneficial for both parties as the bank reduces its bad loans and the borrower gets rid of all the legal & financial issues associated with it. After the successful fulfilment of OTS, the bank reduces its overall bad loan ratio & works towards better managing its balance sheets. The borrower also steps towards better management of his business & finances and can be eligible for standard banking products and services necessary for sailing in the business.

Here are some key points to understand about a one-time settlement:

1. Negotiation Process: The borrower/debtor initiates the negotiation by expressing their intention to settle the debt through a one-time payment. The creditor evaluates the debtor’s financial situation and determines whether they are eligible for an OTS. If both parties agree, negotiations begin to determine the settlement amount. Banks also time to time launch schemes to offer OTS  to borrowers with respect to cleaning their balance sheets.
   
2. Settlement Amount: The settlement amount is typically less than the total outstanding debt. Banks may offer a reduced amount to encourage debtors to pay immediately. The exact percentage of reduction depends on various factors, such as the debtor’s financial circumstances, the age of the debt, and the valuation of collaterals.
   
3. Tenor & Payment: One-time settlement requires the debtor to make a token payment in the no-lien account usually 5-10%  in order to the issuance of an OTS letter from the bank and also to show trustworthiness towards his commitment of payment.
   
   OTS can be issued for a timeline of 3 months to one year depending upon the transaction size. Once the payment is made, the debt is considered settled, and the debtor is relieved of any further financial & legal obligation related to that particular debt.
   
4. Debt Resolution: One-time settlements are commonly used to resolve non-performing loans (NPLs), where borrowers fail to make regular payments and the debt becomes delinquent. By accepting an OTS, the creditor avoids the lengthy and potentially costly process of debt recovery, such as legal proceedings or selling the debt to collection agencies.
   
5. OTS Letter: To ensure both parties adhere to the terms of the settlement, a letter is issued from the bank to the borrower. This letter outlines the settlement terms, the amount to be paid, tenor and any conditions or consequences in case of non-compliance.

Options for Borrower (for payment of OTS)

1. Borrowing from Family or Friends: If you have a trustworthy and supportive network, you may consider borrowing the necessary funds from family members or friends. This option can offer flexibility in terms of repayment and potentially lower interest rates or no interest at all. However, it’s crucial to approach such arrangements with clear communication and a written agreement to avoid any misunderstandings or strained relationships.
   
2. Sale of Assets: If a borrower has multiple properties free from bank charge or is willing to liquidate collateral with permission from the bank, then he can liquidate those properties or assets in order to service his OTS.
   
3. Loan for paying OTS: These days under government policies lot of new-age financial institutions come in the front line to take over NPA accounts or provide finance for one-time settlements. As OTS is a time-bound agreement with the bank that needs to be closed as the first priority, to service this agreement, the borrower can seek the help of a new lender who can pay the previous bank on behalf of the client to close the OTS completely.

Loan for One Time Settlement(OTS) or OTS Finance

Once the OTS is approved, the borrower can reach out to the market to seek finance for servicing his OTS. The new lender entered into the transaction and paid directly to the previous bank on behalf of a client for the successful closure of OTS. This way the borrower can successfully close the previous liability along with all the legal & financial issues related to that particular account. This also once again opens the gate for the borrower to make his loan a standard asset & to enjoy the facilities & products of standard banking which was earlier restricted because of NPA status. Here are a few key features of OTS Funding :

• The benefit of settling a huge amount at a lesser value
• Completely closure of NPA account
• Opportunity to make a good financial profile
• Better excel in business with the help of other banking products like CC/OD/LC/BG
• Prevents precious properties from banking Sarfasi Act

Now, let’s see what are the points to remember when opting out of a Loan for OTS :

1. Collateral Valuation: This is an important point as whether it standard loan or an NPA/OTS loan usually lenders prefer good collateral to cover the loan & which can be monetized in the event of default to recover the loan from the borrower. And loan to value ratio is different in all the products as well as the nature of the collateral. Say you will get 90% in case of auto loans & home loans but only get 60-70% in case of loan against property. Similarly one can get 70-80% on residential property but only 60% in the case of commercial property.  So the stress/NPA financing lenders give around 50 % of the total collateral offered whether it is residential commercial or even industrial. The criteria of giving 50% in stress financing is standard all over India among all lenders. Plant & machinery does not have very good vintage in this financing it only gives additional comfort for that loan transaction.
   
2. Costing: The cost of this loan for OTS or stress financing is usually the highest in the segment so the borrower must plan well & confident about the repayment of this new loan & also about exit from this loan. The borrower can not plan for long-term association with this new lender due to this high cost of financing which makes bigger monthly EMIs for repayment. It’s always better to plan about taking an exit after some time before entering into a transaction through the sale of any assets or preferably taking an exit through some new standard nbfc which can be possible after 3-4 quarters of months after this new loan. The client can opt out few nbfc for taking over this loan which offers a better rate of interest, longer repayment tenure & provides good working capital.
   
3. Repayment Tenor: Typically, stress financiers offer a repayment period of 3-5 years for the new loan. This results in heavier monthly EMIs for borrowers. Consequently, long-term engagement with these lenders is generally not feasible. Therefore, it is essential to devise a plan to exit this loan as soon as possible.
   
4. Loan Assignment to Asset Reconstruction Companies(ARC): Assigning your NPA loan to an arc company is a good idea. No, Asset Reconstruction Companies buy NPA loans from banks & NBFC which are then assigned to them instead of closure of account with the previous bank/nbfc. This only gives temporary comfort to the clients but he again stuck into the next financial trap as ARC provides
   
   a. High Cost of Financing
   
   b. Shorter repayment period(4-5) years
   
   c. ARC requires assignment of loan which is usually denied by the bank in case of One Time Settlement(OTS)-A major issue in cases where borrowers looking for One time settlement Loan.
   
   d. Most importantly borrower can not take an exit or transfer his ARC loan account to another standard financial institution as the loan with the asset reconstruction company remains under NPA status as it was not closed with the previous bank/nbfc, so this restricts the other standard financial institutions for taking over arc loan. The only option left with the borrower is to completely close the arc loan which creates a burden on business due to higher emi’s because of high cost & shorter tenor.
   
5. Private or other financing options: Some companies or individuals offer financing for these transactions at very low or competitive interest rates and with comfortable repayment plans, but we suggest you check the credentials of that company/person by his knowledge of the subject or through a background check and most importantly checking their client base. Usually, these offerings are very fishy and kill clients a lot of time & money on these ventures which in last fails in the end.
   
6. Other Options: The best option for taking finance for your OTS is to through any RBI-registered NBFC which is specially working to provide finance for NPA accounts & also provides finance for OTS transactions. Despite high costs & shorter repayment tenure, these companies offer one-time closure of previous NPA accounts settled under the OTS scheme & give the client an NPA-free status which enables the borrower for the next round of financing in some standard/regular nbfc with better financing terms. This provides a proper & complete solution for the borrower to manage their business & finances in a better way.
   
7. Manage your business/income: Before approaching any new lender to take over your NPA account under OTS, one must ensure his balance sheet or source of repayment for this new loan. This new lender verifies the repayment capacity of the borrower through business income/accruals which can be further verified by last year’s balance sheet of the business, transactions in the bank account & GST paid last year. If you have rental income then you must submit rental/lease agreements & bank statements in which rent is being credited.

Conclusion: One-time Settlement(OTS) is one of the best tools to come out of NPA situations and legal & financial issues associated with that account. If one has a clear view about resolving his issue with the bank/nbfc then one must consider the OTS. Also, the borrower requires a very clear view of servicing his OTS through any of his personal borrowings through friends & relatives or by monetizing any of his assets or planning through taking a loan for servicing his one-time settlement. This provides complete closure of previous NPA account issues & one can restart his business/financial life after the successful completion of his OTS.

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