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Exploring the Process of One-Time Settlement in Banks

Posted Date: 03-08-2023 Posted By: user

As the level of NPA or Non-Performing assets increases, it becomes a threat to the success of the financial institution. Then, the management of NPA becomes important. Only a comprehensive management strategy can bring an effective change in the situation.

The Reserve Bank of India or RBI has given a detailed definition in its master circular. Not only that, but it has also given guidelines and a basic framework for managing NPA in the company.

If we think about various NPA settlement methods, then One-Time Settlement is a prominent one.

RBI Guidelines for One-Time Settlement

Before going for One-time settlement a bank or financial institution should ensure compliance with the following guidelines.

  • Authority that approves the settlement proposal should not be the same as that approves the settlement proposal. But the hierarchy level of sanctioning committee can be the same as the approval authority.
  • The sanctioning authority should have exercised the power judiciously and it has adhered to the guidelines issued by the bank.
  • There should not be any laxity in the conduct and post-disbursement supervision.
  • There should not be any act of commissions or omissions on the part of the staff leading to a debt that becomes irrecoverable.

These guidelines of one-time NPA settlement need to be followed by financial institutions to recover the debts.

One-Time Settlement (OTS) Scheme of NPAs

One-time settlement is the step taken by a bank when all other possible expedient steps to recover the dues have been tried and there are no other possibilities of recovering debts. Also, the settlement proposal has to be in the larger interest of the bank.

The bank may enter a compromise settlement process with the defaulter and the cases of compromise should be vetted by appropriate authorities.

When the bank enters a compromise settlement in NPA, the bank must ensure that the NPV or the Net Present Value of the settlement amount should not be less than the Net Present Value of the realizable value of securities.

The One Time Settlement Policy of the Bank covers all sectors including MSME.  The internal policy and its execution depend on the bank. For example, if in a bank, the existing OTS policy is based on the Net Present Value of the available security factored at 12%, reckoning 4 years as the factor of realization, then the period of the security that works out is 62% of the value of the property.

The policy may be based on the Distress Sale Value (DSV)of the security (it might be assessed by two independent valuers). The DSV is reckoned at 75 % of the realizable market value in that case.

The policy will cover all NPA accounts. They will also include assets where the action is initiated under acts like Sarfaesi Act. Also, they have been explored by all other possible means like Lok Adalats, DRTs, etc. The decreed accounts are subject to obtaining a consent decree from Court DRT/Lok Adalat.

In the case of MSME, any account falling under willful default will be considered on a case-to-case basis.

The payment period for OTS amount should be paid preferably within six months from the date of approval. Out of the total amount, 25 percent amount is paid upfront, and the remaining balance has to be paid within six months without any interest.

If the amount is paid within one year, then the interest at base rate will be charged from six months to one year.

While formulating the policy for the One Time Settlement, factors included are realizable value of securities, present status of the unit, and possibility of better recovery by other means.

If the borrowers fail to meet the OTS commitment, then all concessions are withdrawn, and the bank can proceed with legal recovery process