Bank Loan Settlement in Patna Bank OTS and debt settlement — process, documents and remedy.

A bank loan settlement — called a bank OTS or debt settlement — is a negotiated compromise in which the lender accepts a lump sum or structured payment that is less than the total outstanding, in full and final satisfaction of an NPA account. The borrower pays the agreed amount, and the bank closes the account, releases the securities and issues a No Dues Certificate. It is formally termed a “compromise settlement” in RBI circulars and is governed by the RBI Framework for Compromise Settlements and Technical Write-offs dated 8 June 2023.

No. OTS is available only for accounts classified as Non-Performing Assets under the RBI’s IRAC norms — accounts in default for 90 days or more. Standard assets — accounts current or overdue for less than 90 days — cannot be compromised. Substandard, doubtful and loss accounts, including fully written-off accounts, are eligible. Wilful default and fraud accounts can also be settled under the June 2023 Framework, subject to Board-recorded justification and a 12-month cooling-off period.

No. OTS is a commercial decision of the lender, not a right available to the borrower. The RBI framework treats the bank’s decision on an OTS proposal as a commercial judgment the regulator will not override. However, where the bank’s Board-approved policy provides for OTS in a particular account category, the bank must apply the policy consistently and cannot arbitrarily deny an eligible borrower on grounds not specified in the policy.

From the hardship side: Income Tax Returns for 2–3 years showing decline or loss, audited P&L and GST filings for business borrowers, 6–12 months of certified bank statements across all accounts, medical records for chronic illness, termination letters for job loss, a death certificate where applicable, and a written statement of hardship explaining the original loan terms, cause of default, current income and maximum offer. From the loan side: the facility-wise account statement, sanction letter, security and guarantee documents, and a CERSAI search report for the Patna property charge.

The seven stages are: (1) written OTS proposal with hardship file to the Recovery / NPA department; (2) the bank’s internal assessment against its Board-approved policy, comparing the OTS amount against the net present value of expected recovery through DRT or SARFAESI; (3) Credit Committee approval, commonly above ₹5 crore, and Board approval above the Committee’s delegated authority, often ₹25 crore; (4) OTS sanction letter issued, typically valid 90–120 days; (5) OTS deed signed and payment made by cheque, NEFT or RTGS; (6) No Dues Certificate, withdrawal of DRT and SARFAESI proceedings, return of title documents and CERSAI discharge; (7) credit bureau reporting as “Settled”.

Typical OTS settlements fall in the range of 40% to 70% of the outstanding — that is, the borrower pays 40–70% and the bank waives penalty and interest, and sometimes a portion of principal. The percentage moves with the stage: a first offer after 90 days may be 80–90% of outstanding, after 180+ days NPA it may be 60–75%, after legal notice or SARFAESI it may be 40–55%, and for old written-off accounts of 3+ years it can fall to 25–40%. The bank’s calculus is simple: compare immediate OTS cash against the probability of legal recovery two to four years later, net of 30%+ legal cost.

It depends on what was waived. Waived interest that was claimed as a deduction in earlier years is taxable under Section 41(1) as a cessation of liability, in the year the OTS deed is executed. Waived principal is generally not taxable under Section 41(1) because the original borrowing was not a deductible expense. Section 28(iv) is contested — the Gujarat High Court has held it applies only to non-monetary benefits, while the Madras High Court in Ramaniyam Hotels held that waiver of the principal of a term loan should be taxed under it. Where the loan or interest is converted into equity, Section 56(2)(x) taxes the difference between the fair market value of the shares and the consideration paid. Obtain a written CA opinion before signing the OTS deed.

The account status changes from “Closed” to “Settled”, and that notation remains on the credit report for up to seven years from the date of settlement, typically dropping the score by 75–100 points. This affects eligibility for fresh credit and increases the interest rate on any loan that is approved. The RBI Master Circular permits a later “Settlement-to-Closed Upgrade”: the borrower pays the waived amount, the bank issues an upgrade letter confirming full recovery, and the status changes from “Settled” to “Closed”.

An OTS deed is a binding contract under the Indian Contract Act, 1872. Where the OTS was entered into during DRT proceedings, DRT Patna has jurisdiction to enforce it as consent terms under Section 19 of the RDB Act. The Supreme Court has also held that initiating criminal proceedings for fraud and forgery after a final settlement — particularly one endorsed by a judicial forum — is an abuse of process, and that the sanctity of OTS must be protected. The Patna High Court, however, has repeatedly refused writ petitions to enforce an OTS where the SARFAESI statutory remedy remains available.

Ordinarily, no. In Suman Kumar v. State of Bihar, the Patna High Court held that inability to repay is a personal financial grievance, not a legal wrong, and a writ of mandamus cannot direct a bank to grant a waiver or extension absent a violation of legal or fundamental rights. In Sanjay Kumar Singh v. Punjab National Bank (1 October 2026), the Court refused to entertain a writ to enforce a ₹25.70 lakh PNB settlement despite ₹20 lakh already paid, holding that the SARFAESI remedy must be exhausted first. The writ route is preserved for jurisdictional errors — not for enforcing a commercial settlement.

Not automatically. An OTS signed only by the corporate borrower does not discharge the personal guarantee liability of the promoters or directors who signed guarantee deeds, unless the OTS deed expressly releases the guarantor. Banks typically require personal guarantors to join the OTS deed as confirming parties. For a Patna company borrower, the guarantor release clause must be negotiated into the deed — not assumed.

Advocate Simran Kumari negotiates and documents bank OTS and debt settlement proposals, drafts the OTS deed and hardship representation, and appears before DRT Patna and the Patna High Court where a settlement breaks down — from the Kankarbagh chamber. If the loan account is with a Patna branch, the proposal goes to that branch’s Recovery desk. Call +91 92314 45078 or email advocatesimrankumari@gmail.com with the loan account statement and the latest notice for a same-day assessment.