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What is the process of one-time settlement in banking?

Posted Date: 25-08-2022 Posted By: user

Why do people take loans? It is a great way of helping your finance for various things. You may take a loan for completing your education, buying a new house, the wedding of your kids, to go abroad, or anything else.

If you are a company, then you will take a loan to diversify your business or launch a new project.

You make great planning and ensure that repayment of the loan is done in time. However, no matter how systematic your repayment plan may be, you cannot foresee all the possible bottlenecks. You may become a victim of unforeseen circumstances. There could be an unexpected loss in the business, or you lose your job due to an illness.

Such circumstances will seriously hamper the ability to repay your loan. You will miss the installment and get follow-up calls and reminders from the bank. It affects your credibility and market value.

When a bank or financial institution sanctions a loan, it expects that the loan will be repaid within the stipulated time. For a bank, a loan is an asset that generates income in the form of interest.

When the loan is not paid, it becomes an NPA or Non-Performing Asset. NPA is not desirable for any financial institution. When it goes beyond a threshold, it becomes a risk to the survival of the bank. Hence, it requires concrete npa management methods.

When a bank fails to recover the loan, it approaches the borrower with options like a one-time loan settlement. Though it looks like a simple offer, it may ruin the credit score of the borrower.

What is a One-Time Loan Settlement?

It is part of the overall npa management policy of a bank or financial institution. In this process, the bank or financial institute agrees to accept a smaller amount instead of the entire due amount. When it does so, the bank waives off the rest of the amount and makes repayment easier for the borrower. The option may be offered by the bank after six months of non-repayment.

The bank takes various measures to investigate the case before arriving at the conclusion. It will allow them to validate the reason for not paying the loan.

How Does the process of one-time settlement carry out?

First, the bank should believe that the reason for non-payment is legitimate. The bank offers a moratorium period. The option is for those borrowers who want to pay the amount in one go. After an agreement, the bank will waive off a part of the outstanding loan amount to make the repayment easy.

How much amount will be written off will depend on the gravity of the financial condition and the ability of the borrower to repay the loan. Since the borrower is agreed to settle the loan, its repayment status will be recorded as “settled” and not “closed”. The credit score of the borrower will be affected by the difference.

One-time settlement is considered an important tool of npa management policy.

Alternatives

It is quite obvious that opting for a one-time settlement is not advisable unless it is necessary. There are some other alternates to it.

The borrower should liquidate the savings instead of applying for a loan. Also, it should negotiate with the bank to request an extension for the repayment term. Or, it should ask for a restructured repayment plan.

The borrower can request the bank to hold off the interest rate or reduce it for some time.

One-time settlement is the last resort. For a bank also, it is not a profitable proposition. Therefore, it will use it only when there is no other solution.