One-Time Settlement (OTS) funding is a specialized finance facility designed to take over the NPA (Non-Performing Asset) debt liability of a borrower. This scheme offers mutual benefits for both borrowers and financial institutions such as banks and NBFCs. Through NPA funding, borrowers gain relief from financial and legal litigations and have the opportunity to settle their bad debt at a reduced price. Concurrently, banks can clean their balance sheets from these bad loans, thereby reducing their NPA ratio.
Benefits of OTS Funding
- Borrowers’ Relief: Borrowers are relieved from financial and legal issues with the bank and can settle their bad debt at a reduced price.
- Banks’ Advantage: Banks can improve their balance sheets by reducing their NPA ratio, which is crucial for maintaining financial health and complying with national economic standards.
- Restructured Repayment: The new lender restructures the repayment schedule based on mutual understanding, providing more flexible terms to the borrower.
Economic Impact and Statistics
According to the Ministry of Finance, the financial year 2022 showed significant improvement:
- Increased Recovery: Collection from NPAs has increased steadily from FY2018 to FY2022.
- High Recovery Rates: In FY2022, the highest recovery was achieved under the Insolvency & Bankruptcy Code compared to Lok Adalats, SARFAESI Act, and DRTs.
- Declining NPA Ratio: The gross NPA ratio declined from 14.56% in March 2018 to 5.53% in December 2022, a positive sign for the Indian economy.
- OTS Recoveries: Around 11 banks recovered nearly Rs.61,000 crore through One-Time Settlements in the three financial years up to December 2021, highlighting the vital role of OTS in managing banks’ balance sheets and enhancing their lending capacity.
Importance of OTS Finance in One-Time Settlement Schemes
OTS Finance involves loans provided by RBI-registered financial institutions to take over NPA accounts settlement under the OTS scheme. This process includes:
- Restructuring NPA Accounts: Offering sufficient repayment tenure and resolving legal issues associated with the previous bank.
- Example Scenario: A borrower, after defaulting on a loan, applies for an OTS, negotiates a reduced settlement amount, and secures an OTS finance loan to pay off the agreed amount. The new lender then restructures the repayment schedule, often providing a moratorium to help the borrower focus on business recovery without immediate financial pressure.
Conclusion
One-Time Settlement schemes and OTS Finance play crucial roles in managing NPAs and improving the financial stability of both borrowers and banks. By understanding and leveraging these schemes, financial institutions can maintain healthier balance sheets, and borrowers can effectively manage and overcome debt challenges.
