One Time Settlement funding is a type of new finance facility stipulated only for taking over the NPA debt liability of a borrower settled under a one-time settlement scheme toward mutual benefits of both borrower & banks/nbfc. Through npa funding, the borrower gets relief from all the financial & legal litigations with the bank and also gets an opportunity to settle their bad debt at a reduced price while banks also get the opportunity to clean their balance sheet from these bad loans/non-performing assets. This new lender restructures the repayment schedule of the borrower as per mutual understanding between the two. In fact, banks are also always under pressure to lower their npa ratio which is also subject to the national economy. So one-time settlement schemes are always a tool for cleaning their balance sheet & reducing their NPA ratio. Following is the data released by the Ministry of Finance in the financial year 2022 :
This shows an increase in the collection from FY2018 to FY2022
It also shows in FY 2022, the total amount recovered under the Insolvency & Bankruptcy Code has been the highest compared to others such as Lok Adalats, SARFAESI Act ,and DRTs in this period.
Also, statics & data shows that the gross NPA ratio is declining from 14.56% in March 2018 to 5.53% in December 2022 which is very encouraging for the Indian economy.
Furthermore, other data shows that there are about 11 banks that recovered nearly Rs.61,000 crore by way of One Time Settlement in three financial years up to December 2021. This clearly indicates that one-time settlement or OTS plays a very vital role in managing banks’ balance sheets which also means the availability of more finance or enhanced lending by financial institutions.
Importance of OTS Finance for One-Time Settlement Schemes
We understand from the above data that our economy is getting stronger year to year as the NPA ratio is declining in the last few years & also one time settlement plays a crucial role for banks & other financial institutions in settling their bad loans/NPAs. Now, let’s understand the importance of OTS Finance in one time settlement transactions.
OTS Finance is a loan given by any RBI-registered financial institution to take over an NPA account liability settled under the One-time settlement scheme in order to restructure the NPA account by giving sufficient repayment tenor & discharging all legal issues associated with the previous bank.
Suppose a borrower has taken a loan of Rs.8 crores from a bank 10 years out which he paid only 4 years. So after four years, the borrower stops paying to the bank & defaulted due to some delays in the debtor’s payment. So bank classify his account Non-Performing Account (overdue more than 90 days). Bank issues a demand notice 13(2) to borrower towards outstanding of Rs.6.5 crores. Now, the bank demands the entire loan to be paid back otherwise they will take legal action under Sarfasi Act.
Sarfasi Act allows banks to sell or auction underlying securities or collateral without any legal permission required from the court.
Bank has taken symbolic possession of collateral properties and now it is on the verge of the auction of collateral. So one of his friends suggested he must settle the loan for a reduced price. So borrower formally applied a settlement offer under One Time Settlement scheme for Rs.5.5 crores which the bank found reasonable and they issues the OTS letter to the client stating to submit 10% as a token amount with acceptance of OTS and the remaining within the next three months, which is standard in OTS transactions.
Now, the borrower has an internal arrangement of Rs.2 crore from friends & relatives but is still in shortage of Rs.3.5 crore so he decided to take a new loan for paying OTS-one time settlement.
He started looking out in the market for lenders who can fund OTS transactions or companies interested in taking over NPA & OTS Finance.
Sooner he met with a company that specializes in financing OTS transactions. Company representatives collected all the required documents from clients & arrange a meeting with other team members and seniors. After a satisfactory discussion, the company issues an in-principle approval letter which got accepted by the client & company directly pays the previous bank & takeover his NPA account liability. The new lender also restructure the repayment schedule & even gave him a moratorium of six months so that the client focuses on his business and will be free from all legal litigations with the previous bank.
