In this blog, we learn everything about the One-Time Settlement (OTS) of loans.
What is the full form of OTS in banking?
OTS Full Form: ONE -Time Settlement
It refers to the Settlement of a defaulted loan, which encourages the borrower to pay in a lump sum at a lower price.
What is the One-Time Settlement?
A one-time Settlement is a legal contract between a financial institution (bank) and its borrower to settle a Non-Performing Loan (NPL) at a reduced price. This is beneficial for both parties, as the bank reduces its bad loans, and the borrower gets rid of all the legal and financial issues associated with them.
OTS in Banking:
Through OTS, the bank reduces its overall bad loan ratio & works towards better managing its balance sheets. It also benefits the bank in the fast recovery of its funds and frees up the resources to better focus on its core activities.
The borrower also steps towards better management of his business & finances, and can be eligible for standard banking products and services necessary for managing the business.
One Time Settlement (OTS) Scheme
From time to time bank also offers the OTS scheme to its NPA borrowers to recover its bad loans and clean their balance sheets by reducing NPA ratios. The OTS scheme offerings are totally at the bank’s discretion, but the borrower also asks the bank for OTS & shows his intention to pay the loan.
This way, borrowers also get the benefit of repaying their outstanding loans at a reduced price.
The banks like PNB & SBI offer time-to-time OTS schemes to their NPA account borrowers.
Here are some key points to understand about a one-time settlement:
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- 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.
- 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 collateral.
- Tenor & Payment: One-time settlement requires the debtor to make a token payment in the no-lien account, usually 5-10% , to obtain 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.
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NPA 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.
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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, the tenor and any conditions or consequences in case of non-compliance.
Click Here to Get a Loan for OTS
Options for Borrowers for the Payment of OTS
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- 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.
- 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 to service his OTS.
- Loan for paying OTS: These days, under government policies, a lot of new-age financial institutions come to the forefront 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 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 or OTS Loan
Once the OTS is approved, the borrower can approach the market for a one-time settlement loan. The new lender issues an OTS loan and pays directly to the previous bank on behalf of a client for the successful closure of the 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 Loan :
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- The benefit of settling a huge amount at a lesser value
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- Complete closure of the NPA account
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- Opportunity to make a good financial profile
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- Better excel in business with the help of other banking products like CC/OD/LC/BG
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- Prevents precious properties from banking Sarfasi Act
- 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 funding provides a comprehensive solution for the borrower to manage their business & finances more effectively.
Now, let’s see what the points are to remember when opting out of a Loan for OTS :
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- 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 to 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 a 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 for giving 50% in stress financing are standard all over India among all lenders. Plant & machinery does not have a very good vintage in this financing; it only gives additional comfort for that loan transaction.
- 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 a long-term association with this new lender due to this high cost of financing, which makes the monthly EMIS bigger 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 asset, 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 of a few NBFCs for taking over this loan, which offers a better rate of interest, longer repayment tenure & provides good working capital.
- 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.
- Manage your business/income: Before approaching any new lender to take over your NPA account under OTS, one must ensure their 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:
OTS -One-Time Settlement is a great tool for NPA account borrowers to close a loan at a reduced price and come out of the legal issues associated with it. It helps the borrowers in restarting their financial life, managing their credit status, and availing standard banking in the future.
