Are you a bank defaulter looking for an option to convince the bank at the least amount of loan repayment? Do you know what this policy means? And what exactly is the policy?
If not, don’t worry because this article will be a comprehensive guide on the one-time settlement scheme. By the end of this article, you will have all the information about the whole procedure of the OTS scheme.
You will also know about the detailed policy of OTS and how its calculation is done? But we jump deeper inside; let’s know what precisely the one-time settlement is?
What is One Time Settlement or, OTS?
The term OTS stands for One-time settlement. One-Time Settlement is a compromise settlement carried out by the banks to recover the NPAs (non-performing assets) loans from the defaulters who are unable to pay the whole loan amount with interest.
What is OTS Scheme?
OTS scheme refers to a one-time settlement scheme under which a loan settlement process initiates between the defaulter and the bank. During this process, the loan defaulter urges the bank to pay the due at once, and the bank agrees to take an even lesser amount than the actual due amount.
Here, the bank compromises with the loan amount in recovering the NPAs (non-performing assets). If the borrower repays the amount at once in a single installment. Then the bank used to wave off their profit portion of the loan amount.
As per the mandate guideline of RBI (Reserve bank of India), every bank should have a mandatory policy of recovering loans which will play a significant role in the settlement and negotiation of NPAs (non-performing assets).
As a result, this provision of loan recovery ensures the speedy recovery of the loan amount from the defaulters, which helps in maintaining the liquidity and cash flow. It maintains a healthy economy in the country.
The provision of the OTS (one-time settlement) scheme varies in different sectors. For instance, it is clear cut for the MSMEs and agriculture.
The OTS scheme is also known for settling the bad loans by the attachment with the security when the defaulter borrowed the loan amount.
This security may be in the form of a house, land, or any other property distrained by the bank under the OTS scheme if the defaulter did not repay the principal amount of the loan.
Therefore, the provision of one-time-settlement plays a significant role in all banks working closer to deal with the non-performing assets to recover bank loans from the defaulters.
This provision does not apply to all the defaulters. There is specific condition and criteria for applying this provision.
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Procedure for One Time settlement
Suppose you have borrowed a specific loan amount, but now, you are not in a condition to return or repay to the bank. Then, you may follow the procedure as mentioned below.
- You may approach the bank to inform them that you are unable to repay the loan amount for a valid reason. The reason may be any health issues or being unemployed.
- Now, the bank can consider the way of a one-time settlement.
- A one-time settlement is also done in a dispute between the borrower and the lender.
- The bank can opt for the one-time settlement when the borrower fails to deposit their three consecutive loans EMIs.
- The borrower must have a valid and solid reason for being a defaulter, like he has a huge loss in his business that he could not recover, severe health issues, or unemployment.
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Conditions When the Banks opt of OTS
Usually, the bank offers one-time settlements for those facing a lot of economic difficulties at their level. However, it sounds good and beneficial, but it affects your CIBIL worse. Now, the defaulter will not be able to take a credit card from any bank in the future.
In the case of a company, the status is declared as junk status and bankrupt. Generally, the one-time settlement with a company is done as a last option when there is no scope of loan recovery. Legal action is also taken against the borrower.
According to the RBI (Reserve Bank of India) guideline, the bank can choose the option of OTS dealing when the defaulter’s account is declared as an NPAs. Remember that once a one-time settlement is done, the defaulter will have to pay the amount in one shot.
But, in case the defaulter failed to repay the loan amount in one shot. Then he will be given another chance to repay at least 25% of the amount in the first installment, and then the rest 75% of the installment amount can be paid within one year along with a specific interest rate. This interest rate will be as per the existing landing rates.
Now, a question may arise to your mind if you are an employee of a loan defaulter company whose account has been dropped in the category of NPAs. So, will it impact its employees?
The straightforward answer is No. In the case of a one-time settlement, there is nothing to do with its employees because it is the direct deal or settlement between the bank and the company.
But, if the company decides to wind up company to recover their dues, then the company employees will be in the first queue to take dues from the proceedings of the company’s assets sale then after the income tax department and followed by the bank.
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How is OTS calculated?
The one-time settlement is calculated on the basis of outstanding principal. The outstanding principal means the remaining amount of the original loan amount in addition to interest.
It is calculated as:
- The remaining amount of the original loan (outstanding principal) till the date of non-performing assets (NPA).
- In addition to the simple interest at the rate of 11% per annum for twenty-seven months plus ARO dues plus RC collection charges.
For example, suppose you take a loan amount of five lac rupees but you are not able to repay it due to some miserable conditions like health issues, huge loss in your business or you become unemployed. In this condition, you can request the respective bank for OTS (one-time settlement).
After receiving your application, the bank will verify your present situation whether you are really unable to repay or pretending to be unemployed. If the bank agreed on OTS. then
Can I get a Loan after a One Time Settlement?
If you are looking to get an immediate loan after a One-time settlement then, it will be quite difficult, and the chances will be equivalent to no. But once you increase your credit score and become able to maintain a good track record and history. Then, the bank can issue your loan amount again. For this, you will have to do certain things, which are listed below.
- Improve your track record:
Before considering your loan application, the bank checks the CIBIL score. So, it would help if you had to maintain it first by clearing all your dues, bills of credit card, etc. as paying the monthly installment can significantly increase your CIBIL.
- Credit card management
Keeping too many cards and paying their bill can be harmful. So, avoid marking red in your report. Keep paying the annual charge of the credit card and maintain it properly. Instead of using too many credit cards, you should maintain only a few. Make sure to close the last card before you take the new one. And also, the older card must be retained with a better history. It will be helpful in raising your credit score.
- Start FD
You can start a fixed deposit of at least up to 40-50 thousand and then apply for a credit card. The bank will easily issue you up to 70%-80% limit of your fixed deposit amount. It will also help in raising your credibility and the CIBIL score.
Maintaining a good CUR (credit utilization ratio) will also play a significant role in improving your good CIBIL score.
- Maintain Your Credibility
If you want to maintain a healthy credit rating, then you should only use the 30% amount of your credit limit. You must avoid overconsumption of credit limit, which will not let you spoil your CIBIL score, and credibility will be maintained against the credit card provider. It will also help you to increase your credit score.
- Avoid loan inquiries
If you have just come out from the one-time settlement provision. It would help if you did not make an inquiry again and again for the loan or credit card on an immediate basis. It will adversely affect your CIBIL score.
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What is OTS policy?
Now, let’s understand the OTS policy and the eligibility criteria in detail in what condition the banks accept your application for OTS.
- The company’s application for the OTS will be only shortlisted if the company will be a defaulter for the last 3 years. The bank also ensures whether the company is not a defaulter of having any harmful intention.
- The company will be considered for the one-time settlement when it will become unable to work on any new or running projects.
- The company shutdowns all its commercial production, and there is no hope for the growth and survival of the company. Then, it will be considered under the one-time settlement provision.
- The banks also check the company’s balance sheet to ensure the company’s massive losses from the last three to four years. There should be no sufficient funds to maintain the institutional liabilities.
- If the IDBI prescribed that the loan recovery from the company is crucial.
- The bank also checks the defaulter’s account details before considering OTS to ensure that the borrower is not trying to take any advantage of extra benefits by falling under the category of one-time settlement.
- The one-time settlement in sub-standard and the standard category is discouraged by the bank.
If you want to retake a loan after a one-time settlement. You must focus on repairing your credibility and CIBIL instead of immediately seeking to take loans.