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Supreme Court: OTS Scheme Not a Borrower’s Right Without Upfront Payment
The Supreme Court of India has ruled that a bank’s One-Time Settlement (OTS) scheme cannot be claimed as a matter of right by borrowers unless they meet all the conditions, including the mandatory upfront payment. The verdict came in the Tanya Enterprises vs State Bank of India case, reinforcing that OTS is a concession, not an entitlement.
Author: Ashish Shan
Published: 22 hours ago
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What is OTS?
A One-Time Settlement is a special scheme used by banks to recover loans that have turned into non-performing assets (NPAs). Instead of pursuing lengthy legal recovery, banks allow borrowers to settle their dues by paying a reduced lump sum amount, usually less than the total outstanding but more than what the bank expects to recover otherwise.
For example, if a borrower owes ₹10 lakh, the bank may agree to close the account with a settlement of ₹6 lakh, provided it is paid within the stipulated time. Once paid, the account is considered settled and the bank writes off the balance.
Why the Court Insists on Upfront Payment
The Supreme Court clarified that while banks can announce OTS schemes, borrowers must strictly comply with the rules. The upfront payment requirement, usually 5%–10% of the settlement amount, is a safeguard to ensure:
- Genuine intent – The borrower is serious about repayment.
- Protection of public funds – Prevents misuse by borrowers who apply only to delay recovery.
Fairness in settlement – Ensures that only those willing to make immediate sacrifices benefit from the scheme.
In the SBI case, the borrower applied under OTS but did not pay the mandatory advance. The Court upheld the bank’s right to reject the request, stating that courts cannot compel banks to extend OTS benefits without compliance.
Why OTS is a Concession, Not a Right
The ruling underlines that OTS is a policy tool designed by banks to clean their balance sheets and recover bad loans faster. Borrowers cannot demand it as a legal right, since the scheme itself is voluntary and conditional. Unlike regular loan contracts, OTS terms are flexible, bank-specific, and time-bound.
By reinforcing this distinction, the Court has attempted to strike a balance between borrower relief and bank discipline.
Implications for Borrowers and Banks
- Borrowers must be ready with the initial deposit before applying for OTS
- Banks gain legal clarity to enforce scheme conditions and avoid unnecessary litigation.
- Courts are unlikely to intervene unless banks act unfairly after accepting OTS payments.
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This ruling comes at a time when Indian banks are tightening recovery norms and the Reserve Bank of India has asked all regulated entities to adopt board-approved policies for OTS and technical write-offs.
The Bigger Picture
The Supreme Court’s decision strengthens the banking sector’s hand in managing bad loans. While OTS remains an important relief measure for stressed borrowers, it will now work strictly within the framework of bank rules, ensuring transparency and accountability.
In short, the message is clear: OTS is a privilege, not a right—and upfront payment is the key that unlocks it.
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