Definition
One-Time Settlement (OTS)
A One-Time Settlement is a negotiated agreement where a bank accepts a lump-sum payment less than the full dues to close a defaulted loan account.
OTS lets a lender realise a quick, certain recovery on a bad loan rather than pursue long, uncertain legal action. The borrower pays an agreed amount, the lender writes off the balance as a haircut, and the account is closed.
Indian banks use OTS, often under board-approved policies, for accounts where prolonged recovery would yield little more. The RBI has issued frameworks, including compromise settlements, that allow OTS even for some classified accounts, subject to safeguards against willful defaulters benefiting unduly.
Related terms
- Write-Off (Loans)A loan write-off is the removal of a bad loan from a bank's balance sheet against provisions already made, even though the bank may still pursue recovery.
- Recovery (Loans)Loan recovery is the money a bank gets back from a defaulted or written-off borrower, through settlement, asset sale, legal action or insolvency proceedings.
- Haircut (Resolution)A haircut is the portion of their dues that lenders forgo when a stressed loan is resolved, settled or sold below its full value.
- Willful DefaulterA willful defaulter is a borrower the RBI defines as one who can repay but deliberately does not, or who diverts or siphons off borrowed funds.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.