Resolution and Settlements: Negotiating One-Time Settlements (OTS) Amidst Active DRT Proceedings
One-Time Settlement (OTS) has become one of the most effective and commercially viable methods for resolving loan disputes in India, particularly where prolonged litigation before the Debt Recovery Tribunal (DRT) may not serve the interests of either the lender or the borrower. An OTS is a negotiated arrangement under which a bank or financial institution agrees to accept a mutually agreed amount—often lower than the total outstanding dues—in full and final settlement of its claim. In return, the borrower undertakes to make payment within the stipulated time, following which the lender agrees to close the loan account, withdraw or conclude pending legal proceedings, release securities, and issue a No Objection Certificate (NOC) or No Dues Certificate. Although DRT proceedings are judicial in nature, they do not prevent the parties from resolving the dispute amicably through negotiation. On the contrary, settlements during pending litigation are actively encouraged because they reduce litigation costs, expedite recoveries, and ease the burden on tribunals. Recent RBI guidelines continue to recognize compromise settlements as a legitimate resolution mechanism for stressed assets.
One of the most common misconceptions among borrowers is that once a bank files an Original Application before the DRT or initiates SARFAESI proceedings, settlement is no longer possible. This is legally incorrect. Banks and financial institutions retain the discretion to negotiate and conclude compromise settlements at almost every stage of the recovery process. Negotiations may commence before filing the Original Application, during the pendency of DRT proceedings, after issuance of a Recovery Certificate, during execution proceedings before the Recovery Officer, during SARFAESI enforcement, and even during appeals before the Debt Recovery Appellate Tribunal (DRAT), subject to the lender’s internal approval policy. Courts have repeatedly recognized that parties remain free to settle disputes outside the adjudicatory process, provided the settlement complies with applicable statutory and regulatory requirements.
An OTS is fundamentally a commercial decision taken by the lender rather than a legal right available to the borrower. Neither the Recovery of Debts and Bankruptcy Act, 1993 nor the SARFAESI Act confers an enforceable right upon a borrower to compel the bank to grant a One-Time Settlement. The decision to accept or reject an OTS proposal depends upon numerous commercial factors, including the age of the account, recoverability of the debt, value of securities, litigation costs, chances of recovery through auction, financial capacity of the borrower, market conditions, and the bank’s internal compromise settlement policy approved by its Board of Directors. The Reserve Bank of India’s comprehensive framework issued in June 2023 requires regulated entities to maintain Board-approved policies governing compromise settlements while recognizing them as a valid method for resolution of stressed assets.
For borrowers, the timing of an OTS proposal can significantly influence its success. Many experienced banking practitioners recommend initiating settlement discussions at an early stage of litigation before substantial legal costs accumulate or before secured assets are auctioned. Once valuable secured properties are sold through SARFAESI proceedings or execution proceedings before the Recovery Officer, opportunities for negotiated settlement may diminish considerably. Nevertheless, banks frequently continue negotiations even after auctions have been initiated where commercially beneficial solutions remain possible.
An effective OTS proposal is far more than a simple request seeking reduction of the outstanding amount. A professionally prepared proposal generally includes a detailed explanation of the borrower’s financial circumstances, reasons for default, current income position, available funding sources for settlement, timeline for payment, valuation of secured assets, previous repayments, and justification for the proposed compromise amount. Documentary evidence supporting financial hardship, business losses, medical emergencies, economic downturns, or other relevant circumstances often strengthens the proposal. Where settlement funds are being arranged through sale of assets, refinancing, assistance from relatives, investors, or business restructuring, the proposal should clearly identify the source of payment to enhance the lender’s confidence in successful implementation.
During active DRT proceedings, settlement negotiations ordinarily proceed parallel to the litigation. The Tribunal continues to hear the matter unless informed that the parties are actively negotiating. Frequently, parties seek adjournments to facilitate settlement discussions. Once the terms are finalized, they may place the settlement before the Tribunal by filing a joint compromise memo, consent terms, or appropriate applications requesting disposal of the proceedings in accordance with the agreed settlement. Depending upon the stage of the litigation, the Tribunal may record the compromise, dispose of the Original Application accordingly, or permit withdrawal of the proceedings. RBI’s compromise settlement framework specifically provides that where recovery proceedings are pending before judicial forums, settlements should ordinarily be supported by appropriate consent orders or decrees from the concerned judicial authority.
An important practical issue concerns the status of Recovery Certificates already issued by the DRT. Where settlement is concluded after the Tribunal has passed its final order and the Recovery Certificate has been issued, the parties generally approach the Tribunal or Recovery Officer with appropriate applications recording the settlement and requesting closure or withdrawal of execution proceedings upon successful compliance with the agreed terms. Judicial precedents demonstrate that compromise settlements may result in withdrawal or satisfaction of Recovery Certificates where the agreed settlement has been fully implemented.
Borrowers should exercise considerable caution before assuming that an OTS proposal has been accepted. Merely submitting an application or engaging in negotiations does not create a binding settlement. The compromise becomes effective only after the competent authority within the bank formally approves the proposal and communicates the terms in writing. Numerous disputes have arisen because borrowers relied upon oral assurances or informal discussions without obtaining formal approval. Courts have repeatedly emphasized that settlement proposals remain subject to approval in accordance with the lender’s internal policy until acceptance is formally communicated.
The written OTS sanction letter should clearly specify every material term of the settlement. It should identify the settlement amount, payment schedule, due dates, consequences of default, treatment of interest and penal charges, withdrawal of pending legal proceedings, release of mortgages and guarantees, issuance of No Dues Certificate, closure of loan accounts, reporting to credit information companies, and return of original title documents wherever applicable. Borrowers should avoid making substantial payments without obtaining a properly authorized written settlement letter because ambiguity regarding settlement terms frequently leads to further disputes.
Time is usually of critical importance in OTS arrangements. Settlement letters typically prescribe strict payment schedules requiring the borrower to deposit either the entire settlement amount or specified instalments within fixed timelines. Failure to comply with these timelines often entitles the bank to cancel the settlement, revive the original outstanding liability, and continue recovery proceedings. Judicial decisions have generally recognized that borrowers seeking the benefit of compromise settlements must substantially comply with the agreed payment conditions unless the bank voluntarily grants extensions or modifies the settlement terms.
Borrowers should also appreciate the implications of an OTS on their credit profile. Although the loan account is generally closed after successful implementation of the settlement, the account may continue to be reported to credit information companies as “settled” rather than “closed after full payment,” depending upon the circumstances and applicable reporting norms. While settlement usually eliminates continuing recovery litigation, borrowers should understand the potential impact on future borrowing before finalizing the compromise.
Banks likewise derive significant commercial advantages from negotiated settlements. Lengthy litigation before DRTs, SARFAESI challenges, appeals before DRATs, valuation disputes, repeated auctions, and execution proceedings often involve considerable costs and delays. Where a commercially reasonable settlement provides immediate realization of substantial funds with reduced litigation risk, compromise frequently becomes preferable to prolonged enforcement proceedings. The Reserve Bank of India’s regulatory framework expressly recognizes compromise settlements as a valid resolution strategy, subject to robust internal governance and staff accountability mechanisms.
In recent years, Debt Recovery Tribunals have also encouraged consensual resolution through special Lok Adalats and settlement initiatives aimed at reducing pendency while facilitating faster recoveries for financial institutions and quicker closure for borrowers. Such initiatives reflect the broader judicial policy favouring negotiated settlements wherever commercially feasible.
A One-Time Settlement remains one of the most practical and efficient mechanisms for resolving banking disputes even when DRT proceedings are actively pending. While an OTS is not a statutory entitlement, it represents a commercially negotiated solution that often benefits both lenders and borrowers by reducing litigation, accelerating recovery, preserving business relationships, and providing certainty. Success in negotiating an OTS depends upon timely engagement, realistic financial proposals, transparent disclosure of repayment capacity, strict adherence to settlement terms, and careful documentation of every aspect of the compromise. When properly structured and fully implemented, a negotiated settlement can bring an otherwise prolonged DRT dispute to a legally binding and commercially satisfactory conclusion for all parties.
