One-Time settlements (OTS)

• The Reserve Bank of India (RBI) has overhauled regulations governing one-time settlements (OTS) with defaulters and technical write-offs of loans to harmonise the instructions across all regulated entities.

OTS SCHEME

• The One-time Settlement (OTS) tool is used by lenders to recover dues from individuals with a default payment history. The lender agrees for a one-time settlement amount which will be lower than the total amount due.

PURPOSE OF THE DETAILED GUIDELINES

• The primary objective of the detailed guidelines provided by the RBI is to establish a comprehensive framework for OTS and technical write-offs.
• These guidelines aim to define the process, set precedents, and outline a graded framework for staff accountability, all within specific timelines.
• The guidelines also emphasize the need for a settlement policy that includes permissible sacrifices for different exposures and focuses on maximizing recovery while minimizing expenses.

APPROVAL REQUIREMENTS

• The RBI mandates that compromise settlements for fraud or willful defaulters must receive approval from the board of the regulated entity. In cases where the payment period for a compromise settlement exceeds three months, it will be treated as a restructuring.
• Such compromise settlements, along with technical write-offs, need to be approved either by the Managing Director and CEO or a board level committee, and subsequently reported to the board.

COOLING PERIOD

• Borrowers opting for an OTS are subject to a cooling period of at least 12 months for farm credit exposures. During this period, regulated entities cannot assume fresh exposures with these borrowers. Additionally, when there are ongoing judicial recovery proceedings against a borrower, any settlement reached must be approved by the judicial authorities, as specified by the RBI.

EXPANSION OF OTS FRAMEWORK

• An important development is the extension of the OTS framework to include urban co-operative banks (UCBs). Previously, this framework was limited to commercial banks. This expansion acknowledges the growing reliance of commercial banks on OTS as an effective means of recovery, particularly in light of the delays and complexities associated with other recovery routes such as the Insolvency and Bankruptcy Code (IBC).