How does a one-time settlement (OTS) with a bank work for a defaulted loan?

Question

I have defaulted on my personal loan and the bank has offered a one-time settlement. What should I check before agreeing to it? I would like to understand which provision governs this, what it entitles me to, and how long I have before the remedy lapses. I also want to know whether I need a lawyer for this or can do it myself.

MyVakeel Legal Desk · Accepted Answer

In India, the answer to "How does a one-time settlement (OTS) with a bank work for a defaulted loan?" turns on RBI Guidelines on Compromise Settlements 2023, SARFAESI Act 2002, Section 13(8) and Indian Contract Act 1872, Section 63. The points below set out the position and then what to do about it, in the order it should be done.

A one-time settlement is a negotiated compromise where the bank agrees to accept a lump sum lower than the total outstanding in full and final settlement of the loan account, under RBI's June 2023 compromise settlement guidelines.

Under Section 63 of the Indian Contract Act, a creditor can agree to accept a lesser sum in satisfaction of the whole debt, but this must be reduced to writing and clearly marked 'full and final settlement'.

Accepting an OTS usually results in the account being reported to credit bureaus as 'settled' rather than 'closed', which can still affect your credit score for future borrowing.

Before the auction sale is confirmed, Section 13(8) of SARFAESI allows a borrower to redeem the secured asset by paying all dues, which can also form the basis of an OTS negotiation.

Always insist on a No Dues Certificate and a written closure letter after paying the OTS amount, since partial confusion about 'settled' versus 'closed' status causes future disputes.

What to do next: 1) Get the OTS offer and its terms in writing from the bank's competent authority; 2) Negotiate for the account to be reported as 'closed' rather than merely 'settled' if possible; 3) Pay through traceable banking channels and obtain a receipt for each instalment; 4) Collect the No Dues Certificate and check your CIBIL report a few months later to confirm correct reporting.

If you are unsure whether your facts fall inside RBI Guidelines on Compromise Settlements 2023, that is worth checking with an advocate before you commit to a route, because switching later costs time. You can post the details on the MyVakeel forum for a practising advocate to review, or book a paid consultation with a Bar Council verified lawyer in banking law.