One Time Settlement of a Bank Loan in Kerala (OTS): How It Works

When a loan has become a non-performing asset and the bank has started SARFAESI, revenue recovery or DRT proceedings, most borrowers in Kerala ask the same question: will the bank accept a lump sum and close the account? That is a one time settlement, or OTS, and a well-negotiated one time settlement of a bank loan can end a recovery case far sooner than litigation.

An OTS is not a right, and it is not a favour. It is a contract made under the bank’s board-approved policy and the rules of the Reserve Bank of India. This guide explains when banks settle, how to make a proposal, what to check in the sanction letter and what must follow payment.

The Reserve Bank of India describes a compromise settlement as a negotiated arrangement to fully settle the lender’s claims in cash, which may involve some sacrifice of the amount due. The bank accepts less than the full outstanding, and the agreed amount is paid within a short, fixed period.

Some banks announce OTS schemes for a category of loans, with fixed eligibility rules and a formula, open for a limited period. Others agree to negotiated settlements case by case. Both are meant mainly for accounts classified as non-performing assets (NPA), and bank policies usually set conditions first, such as a minimum period since the account became an NPA.

RBI’s Framework for Compromise Settlements and Technical Write-offs, issued in June 2023 and now part of its consolidated directions, applies to commercial banks, co-operative banks and NBFCs. For borrowers, five points matter:

• Board-approved policy. Each lender’s policy fixes the permissible sacrifice after taking into account the current realisable value of the security. Expect your offer to be compared with what the property would fetch.
• Higher approval. A settlement must be approved at least one level above the authority that sanctioned the loan, and no official who sanctioned the loan can approve it.
• Cooling period. The same lender cannot give you a fresh loan for at least twelve months after the settlement. For farm credit, its policy sets the period.
• Consent decree. Where the lender has already gone to a court or tribunal, such as the DRT, the settlement is subject to a consent decree from that forum.
• Short payment periods. A settlement paid over more than three months is treated by RBI as a restructuring.

No. In Bijnor Urban Co-operative Bank v. Meenal Agarwal (2021), the Supreme Court held that no borrower can claim an OTS as a matter of right and that a High Court cannot direct a bank to grant one. A bank that believes it can recover the full dues, for example by selling the property, is justified in refusing. In Assistant General Manager, State Bank of India v. Tanya Energy Enterprises (2025), the Court added that meeting the eligibility criteria is not enough if the scheme’s other conditions, such as the upfront payment, are not met.

The High Court of Kerala takes the same view. In State Bank of India v. Sham P.S. (2024), a Division Bench held that a borrower who breaches the OTS terms cannot ask the court to compel the bank to honour them, and in South Indian Bank v. Rahim H K (2025) it held that rescheduling OTS payments in writ jurisdiction would amount to rewriting the contract. An OTS is won at the negotiating table and kept by paying on time.

A realistic, documented proposal is far more likely to be taken seriously. Before you write to the bank:

• Get the full statement of account and check the interest, penal charges, the date of NPA classification and credit for every payment.
• Know the value of the security. A recent valuation tells you what the bank expects to realise, and so what offer is realistic.
• Show the source of funds and the hardship, with documents: the sale of other property or support from family abroad, and loss of employment, business failure or illness.
• Check whether a scheme is open. If so, use its form and pay any upfront amount it requires. An application without it may not be processed.

Send the proposal in writing to the branch, and to the recovery or stressed assets branch if the account has moved there, and keep the acknowledgment. Negotiation does not stop the time limits in a SARFAESI or DRT case, so any objection or application falling due should still be filed. Our guide on what to do after a SARFAESI notice explains those limits.

If the bank agrees, it issues a sanction letter, often called the OTS letter. Read it line by line before accepting it.

• The amount. It should be accepted in full and final settlement of the account, naming every borrower and guarantor and covering every facility.
• The schedule. The upfront amount, the dates for the balance and any interest on deferred payment.
• The default clause. Sanction letters commonly provide that if a payment is missed, the settlement is cancelled, the money paid is adjusted towards the loan and recovery of the full dues resumes. In State Bank of India v. Arvindra Electronics (2022), the Supreme Court held that extending time under an OTS modifies the contract and needs mutual consent.
• Closure. Release of title deeds, withdrawal of proceedings, satisfaction of the charge and a no-dues certificate.

If a date looks difficult, ask for an extension in writing well before it falls due. A written extension protects you. An assurance over the phone does not.

TransUnion CIBIL explains that when a borrower pays less than the full amount, the account is reported as settled rather than closed, and that lenders see a settled status as a risk. A new loan becomes harder to get, and the lender you settled with cannot lend to you during the cooling period.

The status can be repaired. According to CIBIL, paying the waived amount, obtaining a no-objection certificate and raising a dispute can get the account updated to closed. If you will need a home or business loan soon, weigh this before settling.

Guarantors. A guarantor’s liability generally runs alongside the borrower’s. When the whole account is settled, the guarantors should be released with it, but the letter should say so and should cover any property a guarantor has mortgaged.

Title deeds. Under RBI’s rules for personal loans, which include housing loans, lenders must return all original property documents and remove registered charges within thirty days of full repayment or settlement, collectable at your option from the branch where the loan was serviced or another office where the documents are kept. For a delay attributable to the lender, it must pay 5,000 rupees for each day. If documents are lost, it must help obtain certified copies at its cost within a further thirty days. Business loans fall outside these rules, so write the release terms into the sanction letter.

Closing the cases. Payment should be followed by a no-dues certificate and closure of every proceeding: withdrawal of the SARFAESI measures, a consent decree or withdrawal in the DRT, and a letter from the bank withdrawing any revenue recovery requisition. Check with the Village or Taluk office that the recovery is closed and whether collection charges are claimed. See our guide to revenue recovery notices in Kerala.

• Kerala Bank and urban co-operative banks are covered by the RBI framework, so the same principles apply.
• Primary co-operative societies, including service co-operative banks, function under the Kerala Co-operative Societies Act, 1969. The Government, through the Co-operation Department, has repeatedly announced time-bound settlement schemes for their loans, typically waiving penal interest and part of the interest.
• KSFE, a company owned by the Government of Kerala, has also announced settlement schemes from time to time for chitty and loan arrears, including accounts under revenue recovery.

These schemes open and close on fixed dates and have their own conditions. Confirm with the institution that a scheme is running, that your account qualifies and exactly what will be waived, and get the figure in writing. Once a scheme closes, its concessions cannot normally be claimed.

Adv. K Rajesh Kannan, a High Court of Kerala advocate with over 24 years of practice, advises borrowers and guarantors across Kerala on settlements with banks, including co-operative banks, and with KSFE: checking the dues claimed, preparing and presenting proposals, negotiating terms, reviewing the sanction letter before you accept it, and making sure SARFAESI, DRT and revenue recovery proceedings are closed and title deeds returned after payment. Where a legal challenge must run alongside the negotiation, both are handled together. If a sale notice has already been published, see our guide on the bank auction notice in Kerala, and the Banking Law page for the full scope of work.

This guide is general information. Whether a settlement is realistic, and on what terms, depends on the documents and facts of your loan.

Questions people often ask

Can the bank reject my OTS proposal?
Yes. The Supreme Court has held that no borrower can claim a one time settlement as a matter of right, and courts will not order a bank to grant one. A realistic, documented offer is what moves a bank.

How much discount does a bank give in OTS?
There is no fixed percentage. It depends on the lender’s policy, how long the account has been an NPA, the realisable value of the security and your capacity to pay. Scheme settlements follow a formula; negotiated ones depend on the offer you can support.

Will OTS affect my CIBIL score?
Yes. The account is reported as settled rather than closed, which lenders treat as a risk. Paying the waived amount later and obtaining a no-objection certificate can have the status changed to closed.

What happens if I miss an OTS payment?
Under the usual default clause, the settlement is cancelled, the money paid is adjusted towards the loan and recovery resumes for the full dues. An extension is possible only if the bank agrees, so ask in writing before the due date.

Can I still settle after the auction notice is published?
Only if the bank agrees. Once the auction notice is published, you no longer have a legal right to stop the sale by paying the dues, and once the sale is confirmed to a buyer, the bank cannot back out.

This guide gives general information about the law in Kerala. It is not legal advice on any particular case.