What is OTS
OTS stands for One Time Settlement. It is an arrangement where a borrower with an NPA account negotiates a lump-sum payment — typically less than the full outstanding — to permanently close the loan account.
The bank takes a "haircut" — it accepts less than what is theoretically owed. In return, it avoids the cost, time, and uncertainty of lengthy recovery proceedings. The borrower exits the NPA with a clean closure, avoiding further legal action and asset sale.
Why banks agree to OTS
Understanding the bank's motivation is essential to negotiating effectively. Banks accept OTS for several practical reasons:
Cost of recovery is high. SARFAESI proceedings, DRT litigation, asset management, auction logistics — the cost of full recovery often exceeds what is actually recovered. A negotiated settlement eliminates these costs.
Time value of money. A settlement received today is worth more to the bank than a full recovery that takes 5–7 years through litigation. Banks discount future recoveries heavily.
Asset realisation uncertainty. The bank may hold your factory or machinery as collateral — but selling industrial assets at fair value in a distressed auction is difficult. Buyers know the bank is a forced seller. The bank often recovers less than expected.
Provisioning pressure. NPA accounts require banks to set aside capital as provisions — money they cannot lend. Closing NPAs through OTS frees up provisioned capital.
What determines the OTS amount
There is no fixed formula. OTS amounts are negotiated, and the outcome depends on several factors:
What makes an OTS proposal credible
Most OTS proposals fail not because the amount is wrong, but because the proposal is not credible. Banks receive poorly structured requests regularly — they discount them automatically.
A credible OTS proposal includes:
A clear statement of the current financial position. Not a plea — a factual account of assets, liabilities, income, and capacity to pay. Banks want to understand what you can genuinely raise, not what you want to pay.
A narrative of how the distress occurred. External factors — customer default, receivable delay, supply chain disruption — that demonstrate the distress was circumstantial, not wilful. Banks distinguish these.
Documentary support. GST returns, balance sheets, income tax returns, bank statements for the period of distress. Evidence, not assertion.
A specific settlement figure with a payment plan. Not "we'd like to settle for as low as possible." A concrete number with a timeline — immediate lump sum, or tranches over a defined period.
An understanding of the bank's own position. What is their provision coverage on your account? What would their auction realise? A proposal that demonstrates you understand their position is far more effective than one that doesn't.
When to pursue OTS
The best time is before SARFAESI possession. You have leverage — the bank has not yet incurred the cost of proceedings. An offer that saves them that cost has real value.
During the 60-day SARFAESI window. After receiving a Section 13(2) notice, OTS discussions can run in parallel with a written representation. This is actually a very effective negotiating position — the bank knows you are aware of your rights and prepared to use them.
After possession but before auction. The bank's motivation to settle is still present — they have not yet realised the asset. A credible offer can still succeed.
After DRT proceedings begin. Even in active litigation, settlement is possible and often preferred by both parties. DRTs actively encourage settlement.
What happens after OTS is agreed
Once the bank agrees to an OTS, they issue a formal sanction letter specifying the settlement amount, payment schedule, and conditions. This is a legally binding document — read it carefully before signing.
Upon payment of the agreed amount within the stipulated timeline, the bank issues a No Dues Certificate (NDC) and a No Objection Certificate (NOC) for the release of all collateral. The account is closed.
Your CIBIL record will reflect the settlement — it will show "settled" rather than "closed," which carries a negative flag. This affects future credit access. Factor this into your decision — for some founders, the clean exit is worth it; for others, the credit impact needs to be managed.