Restructuring

Restructuring: a practical guide to your rights, the procedure and what to do first. Legals365 is the legal platform of Advocate B.K. Singh and associates, based in Delhi NCR.

In short. A one-time settlement is a written agreement under which a bank or NBFC accepts less than the full dues, usually on an NPA account, to close the loan. Lenders follow board-approved policies under RBI's 2023 compromise settlement framework. Get the terms in a sanction letter, pay within its time, and collect the no dues certificate, original documents and release of security.

When a borrower cannot pay a loan in full, a settlement is often better for both sides than years of recovery cases. The bank gets money now without the cost and delay of the DRT, SARFAESI auctions or a civil suit; the borrower closes the account, stops the interest and recovery pressure, and gets the security back. Banks call this a one-time settlement (OTS) or compromise settlement. NBFCs, credit card issuers and fintech lenders do the same under various names.

Settlement is not a right, and it is not free. The lender decides whether to settle and on what terms, the credit report usually records the loan as 'settled' rather than 'closed', and a badly documented settlement can leave the borrower or guarantor exposed to a fresh claim years later. This page explains how settlements work under RBI's rules, how they differ for personal loans, credit cards, car loans, home loans and business loans, what the settlement letter must contain, and how to deal with pending cases, guarantors, tax and the credit report.

Rules

RBI Framework for Compromise Settlements and Technical Write-offs (June 2023); each lender's board-approved policy; public sector bank OTS schemes from time to time

Who decides

The lender, through the authority named in its policy; no borrower has a right to a settlement

When

Usually after the account becomes an NPA (more than 90 days overdue); possible at any stage, including during DRT, SARFAESI or court cases

Forums that record settlements

Lender's own sanction letter; Lok Adalat award; DRT or court order on compromise; section 12A or court-annexed mediation

After payment

No dues certificate, closure in credit report, release of mortgage or hypothecation, return of original documents within 30 days under RBI rules

Credit report

Usually reported as 'settled'; can be changed to 'closed' only by paying the waived amount if the lender agrees

Documents

Loan account statement, sanction letter, settlement proposal, settlement sanction letter, payment proof, no dues certificate

What a one-time settlement is

A one-time settlement is a contract under which the lender agrees to accept a stated amount, paid within a stated time, in full and final settlement of the borrower's dues, and gives up the balance. The waived part usually includes penal charges and some unpaid interest, and in deeper settlements part of the principal. Once the settled amount is paid on time, the lender closes the account, releases the security and gives up its claims against the borrower and guarantors as set out in the letter.

It is different from restructuring. In a restructuring, the borrower still pays the full debt, but on changed terms: longer tenure, lower EMI, moratorium or conversion of interest into a separate loan. The account stays open. In a settlement, the borrower pays less than the full debt, usually in a lump sum or a few instalments, and the account closes. Restructuring suits a borrower whose income has dipped but will recover; settlement suits one who cannot realistically pay the full amount at all.

It is also different from a write-off. A bank can write off a loan in its books for accounting and tax reasons, but a technical write-off does not cancel the debt. The bank keeps the right to recover, and borrowers who think a written-off loan has vanished are often surprised by a recovery notice or a DRT case later.

RBI's framework for compromise settlements

In June 2023, the RBI issued a framework for compromise settlements and technical write-offs that applies to banks, NBFCs and other regulated lenders. It requires every lender to have a board-approved policy on compromise settlements, setting out the conditions for settlement, the method of working out the realisable value of security, the minimum amount to be recovered, and the hierarchy of officials who can approve settlements of different sizes. The authority approving a settlement must be at least one level above the authority that sanctioned the loan.

Lenders may settle even with borrowers classified as wilful defaulters or fraud, without prejudice to criminal proceedings against them; such settlements need the approval of the board. After a compromise settlement, the borrower faces a cooling period before the lender can give fresh credit: at least 12 months for farm credit, and for other loans the period fixed in the lender's board-approved policy. Ask your lender which period applies.

The framework does not give borrowers a right to settle. It tells lenders how to decide. In practice, a well-reasoned settlement proposal that shows the lender why a settlement now beats recovery later, in the language of its own policy, has a much better chance than a request for sympathy.

How settlement works for different loans

When banks agree to settle

Most settlements happen after the account becomes a non-performing asset, that is, after instalments or interest stay overdue for more than 90 days. Before that, lenders usually push for regularisation or restructuring. Once an account has been an NPA for some time, especially if recovery has been slow or the security is weak, the lender's own interest in a settlement grows, because every year of litigation adds cost and reduces what it will realise.

Public sector banks also announce OTS schemes from time to time for particular categories, such as small NPAs, MSME accounts or agricultural loans, with eligibility dates and a formula for the settlement amount. Where a scheme applies, the bank must consider your application under its terms; it cannot reject an eligible applicant arbitrarily, though it is not obliged to accept an ineligible one. Private banks and NBFCs mostly settle case by case under their policies.

Lenders are least willing to settle where the security is good and easy to sell, where the borrower appears to have the means to pay, or where they suspect diversion of funds. They are most willing where the security has lost value, the borrower has a genuine hardship, a guarantor has died or disappeared, or the recovery case is old and stuck.

How much will the bank accept

There is no fixed percentage. The settlement amount depends on the lender's policy and on a few numbers: the principal outstanding, the realisable value of the security today (often based on a fresh valuation), the expected cost and time of recovery, the age of the NPA and the provisions the bank has already made against the loan. Banks usually start by asking for the full principal plus some interest; the negotiation is about how much of the interest and charges will go.

For unsecured loans and credit cards, the lender has no security to fall back on, so its realistic alternative is a suit or arbitration and, perhaps, a cheque bounce complaint. That often makes it more flexible. For secured loans, the lender will rarely accept much less than what it expects to get from selling the security, minus the cost and delay of doing so.

Do not quote numbers you have heard from others. A settlement figure accepted for someone else's credit card in 2023 tells you little about your home loan in 2026. When Advocate B.K. Singh prepares a settlement proposal for a secured loan, he first gets a realistic view of what the property will fetch in a SARFAESI auction, because that number, not the outstanding balance, is what the bank's committee will really be weighing.

Steps in a one-time settlement

1. Get the full account statement

   Ask the lender in writing for the loan account statement from the start, showing principal, interest, penal charges and all debits. You need to know exactly what the bank claims and how it built up.

2. Check for a scheme and the lender's policy

   Ask the branch whether any OTS scheme applies to your account and which authority approves settlements of your size. Public sector banks publish scheme details; private lenders usually do not, but the branch can tell you the process.

3. Prepare a written proposal

   Write to the lender proposing a settlement amount and payment schedule, with reasons: your income, the value of the security, medical or business hardship, and what the lender would realise otherwise. Attach supporting documents and pay any upfront deposit the scheme requires.

4. Negotiate and wait for sanction

   The branch forwards the proposal to the sanctioning authority. Expect a counter-offer. Answer in writing. Do not stop engaging, and do not let pending case dates lapse while you negotiate.

5. Read the sanction letter carefully

   The settlement is binding only when the lender issues a written sanction letter. Check the amount, the schedule, what happens if you miss a payment, and what the lender will do on full payment, before you accept.

6. Pay exactly as agreed and collect closure documents

   Pay by traceable mode into the loan account, on or before the due dates. After the last payment, collect the no dues certificate, the original documents and the release of security, and check the credit report after a reporting cycle.

If a recovery case is pending in the DRT or a court, or a cheque bounce complaint is pending, the settlement letter should provide for its withdrawal or for a joint compromise application, and you should make sure that happens.

Writing the settlement proposal

A good proposal is short, factual and backed by documents. State the loan account number, the outstanding claimed, the amount you offer, how you will pay it (lump sum or a small number of instalments within a short period), and the source of the funds. Explain briefly why you cannot pay in full: loss of job, closure of business, medical expenses, death of an earning member. Attach proof such as a termination letter, closure documents, medical bills or income tax returns.

For secured loans, attach a recent valuation if it shows the security is worth less than the bank thinks, and point out anything that makes the bank's recovery slow or uncertain, such as a title dispute, occupation by tenants or a pending case. Do not overstate. A lender that later finds assets you concealed may withdraw the settlement and treat the account as wilful default.

Mark the letter 'without prejudice', so that the offer cannot later be used as an admission of the full amount in court. Keep a copy with the bank's acknowledgment. If a recovery agent pressures you to accept an oral 'settlement' and pay him, refuse; settlements are made only with the lender. Our page on recovery agent harassment explains your rights if that pressure turns abusive.

What the settlement letter must say

The sanction letter is the only document that protects you after payment, so read every line. It should be on the lender's letterhead, signed by an authorised official, and should state the loan account numbers covered, the total outstanding, the settlement amount, the payment schedule with dates, and that payment of the settlement amount will be in full and final settlement of all dues under the account.

It should also say what the lender will do on full payment: issue a no dues certificate, release all securities and guarantees, return original title deeds and documents, withdraw or settle pending cases in the DRT, civil court, arbitration or cheque bounce matters, and report the account correctly to credit information companies. If you have more than one loan with the same lender, make sure every account is named; a settlement of the term loan that is silent on the cash credit leaves the second account open.

Look carefully at the default clause. Many letters say that if any instalment is missed, the settlement fails, amounts paid will be adjusted towards the original dues, and the lender can resume recovery for the full amount. That is common and enforceable, so do not agree to a schedule you cannot meet. If you need more time, ask for it before signing, not after missing a date.

Settlement and your credit score

After a settlement, lenders usually report the account to credit information companies as 'settled', which tells future lenders that the borrower paid less than the full dues. It affects your credit score and future borrowing for some years, though less than an unpaid default does. A 'settled' tag is not illegal or wrong if a settlement was in fact made.

Some lenders, if asked, will agree to change the status to 'closed' if the borrower pays the waived amount, or a part of it, later. That is a matter of negotiation and should be in writing. If the report wrongly shows the account as written off, or still shows dues after a full settlement, raise a dispute with the credit information company and the lender. Under RBI's rules, credit report disputes must be resolved within 30 days, with compensation for delay. Our page on banking disputes and RBI complaints covers credit report disputes in more detail.

Home loan and property loan settlements

A home loan or loan against property settlement turns on the mortgaged property. If the bank has already issued a SARFAESI notice or taken possession, the settlement must be completed before the sale; under section 13(8) of the SARFAESI Act, the borrower can redeem the property by paying the full dues with costs before the auction notice is published, but a settlement for less depends entirely on the bank's agreement. If an auction is imminent, see our page on stopping or challenging a bank auction.

After full payment, the bank must return all original title documents. Under RBI's directions of September 2023, lenders must release original movable and immovable property documents and remove charges within 30 days of full repayment or settlement, and pay compensation to the borrower for each day of delay. Where the mortgage was by deposit of title deeds, the bank returns the deeds and files satisfaction of the charge with CERSAI. Where a registered mortgage deed was executed, a release or reconveyance deed should be registered so that the encumbrance record is cleared. See our page on mortgage deeds for how mortgages are documented.

Check the list of documents returned against the list you deposited, including the chain of earlier sale deeds, allotment letters, possession letters and the builder's NOC. A missing original deed causes problems years later when you sell. For property in a group housing society or on leasehold land of DDA, Noida, Greater Noida or GDA, also collect any NOC the bank had registered with the authority or society, so that the authority's records show the mortgage as released.

Car loan settlements

A car loan is secured by hypothecation of the vehicle, recorded on the registration certificate. If the vehicle is still with the borrower, the settlement amount is usually close to what the lender would get by repossessing and selling it. If the vehicle has already been repossessed and sold, the lender may claim the shortfall, and the borrower should ask for the sale details: the date, the price, the buyer, and whether notice of sale was given. A sale at a throwaway price without notice is a point to raise in negotiation.

After full payment, collect the NOC and Form 35 from the lender, and apply to the RTO to remove the hypothecation from the registration certificate. Until that is done, you cannot sell or transfer the vehicle cleanly, and insurance claims may be paid to the lender. Lenders sometimes delay these papers; under RBI's 2023 directions on release of documents, delay attracts compensation, and a complaint to the lender and then the RBI Ombudsman usually produces them.

Personal loans, credit cards and app loans

Unsecured loans are where most individual settlements happen. Credit card issuers and personal loan lenders often make standard settlement offers once an account is several months overdue. These can be reasonable, but read the offer letter: it should cover the whole card account or loan, state that the amount is in full and final settlement, and promise a no dues letter. An offer by SMS or phone from an agent is not a settlement; ask for the letter on the lender's letterhead or by email from its official domain.

With digital loans, first find out which bank or NBFC actually lent the money; under RBI's Digital Lending Directions 2025, the app must disclose it, and repayments must go to the lender's account. Settle with that lender. Payments to unknown UPI IDs or personal accounts are the most common way people lose money in 'settlements' that turn out not to be.

Many unsecured lenders also hold post-dated cheques or NACH mandates. If a cheque bounce complaint under section 138 of the Negotiable Instruments Act is pending, the settlement letter should say the complaint will be withdrawn or compounded under section 147. See our page on cheque bounce cases.

Business loans, MSMEs and guarantors

Business loan settlements usually involve several facilities, several securities and several guarantors. The settlement letter must cover all the facilities, list all the securities to be released, and expressly discharge the guarantors. A guarantor's liability is co-extensive with the borrower's, and a settlement that is silent about guarantees can leave the guarantor arguing later about whether the guarantee was discharged. Have every guarantor's position confirmed in writing.

MSME borrowers should ask the lender whether its framework for revival and rehabilitation of MSMEs was applied before the account was classified as NPA; a restructuring under that framework may be better than a settlement for a viable unit. For corporate borrowers with large debts and several lenders, settlements may happen within insolvency proceedings under the IBC instead, and personal guarantors to corporate debtors can face insolvency proceedings of their own under section 95. Our page on insolvency under the IBC explains how that route differs.

Promoters who have been declared wilful defaulters can still settle under the RBI framework, but the settlement does not end criminal proceedings and does not automatically remove the wilful defaulter tag. Ask what the lender will do about reporting after the settlement, and get it in writing.

Settling during DRT, court and Lok Adalat cases

A settlement can be reached at any stage of a recovery case. Where the bank has filed an Original Application in the Debts Recovery Tribunal, the parties can file a joint compromise application, and the tribunal records the settlement and disposes of the case. If the borrower defaults on the settlement, the bank may be able to revive its claim or enforce the compromise, depending on how it was recorded. See our page on defending a bank Original Application in the DRT.

Banks bring large numbers of pre-litigation and pending cases to National Lok Adalats held by the legal services authorities several times a year. A Lok Adalat award is final and binding, with no appeal, and is executable as a decree. It is a useful route for small and medium loans, and it records the settlement in a form the bank cannot later dispute. See our page on mediation, conciliation and Lok Adalat.

If criminal cases are pending, such as cheque bounce complaints or, in fraud cases, complaints under the BNS, check what the settlement means for them. Cheque bounce cases are compoundable. Cheating and forgery cases are a different matter, and the bank cannot always withdraw them; a settlement may still help in quashing proceedings in some cases, but that depends on the offence and the court.

Tax and accounting effects

The amount a lender waives can have income tax consequences, and they differ by the kind of loan. For an individual who borrowed for personal purposes, a waiver is generally not treated as income. For a business, the waived amount of a trading liability, such as interest that was claimed as an expense in earlier years, may be taxable as income in the year of the waiver, while the waiver of a loan used to buy a capital asset is treated differently. The rules turn on how the loan was used and accounted for.

Before signing a large business settlement, ask your chartered accountant how the waiver will be treated in your books and returns, and whether any tax deducted or reported by the lender needs to be reconciled. Our page on income tax notices and returns covers tax disputes more generally.

Documents for a loan settlement

Mistakes that undo settlements

• Relying on an oral offer. Only a signed sanction letter from the lender binds it. An agent's promise on the phone does not.
• Paying an agent or a personal account. Pay into the loan account and keep the receipt.
• Missing a settlement instalment. Most letters revive the full claim if a single payment is late.
• Leaving accounts or guarantors out. Every facility and every guarantor should be named in the settlement and the no dues certificate.
• Forgetting pending cases. Make sure DRT, court and cheque bounce cases are withdrawn or compromised on record.
• Not collecting originals. Check every title document and the RC before you sign the receipt for their return.
• Concealing assets in the proposal. A lender that discovers them may cancel the settlement and treat the default as wilful.

What to do this week

• Ask the lender in writing for the full loan account statement and the list of securities and documents it holds.
• Find out whether any OTS scheme applies to your account and who approves settlements of your size.
• Work out what you can realistically pay and where the money will come from.
• Collect proof of hardship and a recent valuation of any security.
• Note dates of hearings in any pending DRT, court or cheque bounce case so nothing lapses while you negotiate.
• Draft a short written proposal marked without prejudice, and keep the acknowledgment.
• Have a lawyer read the sanction letter before you accept it and before you pay.

Getting the settlement checked

In settlements that come to Advocate B.K. Singh's office after something has gone wrong, the problem is almost always in the paperwork: a guarantor not discharged, a second account not covered, a case not withdrawn, or original deeds never returned. These are easy to get right before payment and hard to fix after.

If you want the papers checked before you act, the team of Advocate B.K. Singh at Legals365 can review them and tell you the next step; you can talk to a lawyer here.

Frequently asked questions

What is a one-time settlement with a bank?

It is a written agreement under which the bank accepts a reduced amount, paid within a fixed time, in full and final settlement of a loan. It usually applies to NPA accounts. The account is closed and the security released once the amount is paid as agreed.

Can I force the bank to accept a settlement?

No. Settlement is at the lender's discretion under its board-approved policy and RBI's 2023 framework. Where a public sector bank announces an OTS scheme, it must consider eligible applications fairly, but it is not bound to accept an ineligible one.

How much discount does a bank give in loan settlement?

There is no fixed percentage. It depends on the outstanding, the value of any security, the age of the default, the cost of recovery and the lender's policy. Unsecured loans and credit cards often see larger reductions than well-secured loans.

Does loan settlement affect my CIBIL score?

Yes. The account is usually reported as 'settled', which lowers the score and affects future borrowing for some years. Some lenders agree to report 'closed' if the waived amount is later paid; get that in writing.

How do I get my property papers back after a home loan settlement?

The bank must return all original documents and remove charges within 30 days of full repayment or settlement under RBI's 2023 directions, and pay compensation for delay. Check the documents against the deposit list, and have the CERSAI charge satisfied or a release deed registered.

What should I check in a car loan settlement?

Make sure the letter covers the full loan and states full and final settlement. After paying, collect the NOC and Form 35 and get the hypothecation removed from the RC at the RTO. If the car was already repossessed and sold, ask for the sale details before agreeing to pay any shortfall.

Can I settle a loan during a DRT case?

Yes. The bank and borrower can file a joint compromise application in the DRT, which records the settlement and disposes of the case. Make sure the settlement letter provides for this and that the order is actually passed.

Is a settlement with the recovery agent valid?

No. Settlements must be sanctioned by the lender in writing, and payment must go into the loan account. An agent cannot settle a loan on the phone or collect settlement money in a personal account.

Are guarantors released after loan settlement?

Only if the settlement says so. Ask for a letter and no dues certificate that expressly discharge every guarantor. A settlement silent on guarantees can lead to disputes later.

Can a credit card debt be settled?

Yes. Card issuers often make settlement offers once an account is several months overdue. Insist on a letter from the issuer covering the whole card account as full and final settlement, and a no dues letter after payment.

Is the waived amount in a loan settlement taxable?

For personal loans taken by individuals, a waiver is generally not treated as income. For businesses, waived interest or trading liabilities may be taxable in the year of waiver. Take advice from a chartered accountant before a large business settlement.

What happens if I miss a payment in the settlement schedule?

Most settlement letters say the settlement fails, amounts paid are adjusted against the original dues and the lender can recover the full balance. Ask for an extension in writing before the due date if you cannot pay. Do not accept a schedule you cannot meet.