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by Rakesh Waghela

17.4 Settlement and restructuring decisions

For an NPA loan, the lender’s choices simplify to:

  1. Pursue full recovery (legal pipeline; takes time + cost).
  2. Settlement (One-Time Settlement, OTS) — accept less than full outstanding in exchange for closure.
  3. Restructure — extend tenure / reduce rate / etc.; borrower returns to performing.
  4. Write-off — recognise loss; continue recovery on cash basis.
  5. Transfer to NBFC-ARC (see 17.5).

This page is the decision framework for choosing among (2), (3), (5). Choice (1) is the default if none of these fits; choice (4) is the prudential cleanup.

Settlement (OTS) — when and how

Section titled “Settlement (OTS) — when and how”

When to consider

Section titled “When to consider”
  • Borrower can pay a meaningful lump sum but cannot fully repay.
  • Recovery cost via legal would erode net recovery materially.
  • Recovery probability via legal is uncertain (asset disputed, borrower elusive, prolonged legal timeline expected).
  • Borrower’s other entities / promoters would face cascading damage if pushed to litigation — leverage for negotiating settlement.
  • Time-value of money matters — ₹20 lakh today may be better than ₹30 lakh in 3 years.

When NOT to settle

Section titled “When NOT to settle”
  • Borrower has demonstrated ability + assets but is simply avoiding — legal pressure works.
  • Settlement at very low recovery (< 30%) when assets / PG offer recovery vector.
  • Recent fraud detection — settling rewards bad behaviour; pursue.
  • Strategic / habitual defaulters — settling one encourages others.

Settlement structure

Section titled “Settlement structure”

Typical OTS:

  • Borrower pays X% of outstanding as full and final.
  • Where X typically ranges 40 – 80% for SME WC NPA, depending on age and case.
  • Lump-sum payment within 30 – 90 days.
  • Loan closed; balance written off.
  • NOC issued.
  • Bureau reported as “Settled” (not “Closed in full”) — flags borrower’s bureau record for future lenders.

Approval matrix

Section titled “Approval matrix”

Settlement requires approval per delegated authority:

Settlement haircutApprover
<= 10%Credit Manager
10 – 25%Credit Head
25 – 50%CRO + Credit Head
> 50%Credit Committee + Board ratification

Documentation

Section titled “Documentation”
  • Board-approved Settlement Policy defines approval matrix + acceptable haircut ranges.
  • Per-settlement case memo with rationale.
  • Settlement agreement signed by borrower + PGs.
  • Settlement payment receipt evidence.
  • NOC issued post payment.
  • Bureau update within next reporting cycle.

IRACP implications

Section titled “IRACP implications”
  • Settlement haircut = write-off of the foregone amount.
  • Loan closed on books post-settlement.
  • No upgrade treatment — settled loans don’t “upgrade”; they close.

Fraud / collusion risks

Section titled “Fraud / collusion risks”
  • Borrower may prefer settlement with a high haircut as a fraud tactic — claiming distress when actually able to pay.
  • Investigation before settlement:
    • Borrower’s other businesses / properties.
    • Borrower’s family financial position.
    • Recent asset transfers (often pre-settlement to hide assets).
    • Bureau pull for new loans elsewhere.

If investigation reveals borrower has capacity, decline settlement and pursue.

Restructuring — when and how

Section titled “Restructuring — when and how”

When to consider

Section titled “When to consider”
  • Borrower’s business has temporarily distressed (Covid-like, sectoral shock, one-time event).
  • Borrower has credible plan for return to performance.
  • Cash-flow projections support restructured terms.
  • Borrower has continuing business reality — not winding down.

When NOT to restructure

Section titled “When NOT to restructure”
  • Borrower has demonstrated chronic inability — restructuring just delays.
  • Restructure is a disguised second loan without fresh underwriting.
  • Evergreening risk — restructuring repeatedly to avoid NPA recognition.

Restructure structures

Section titled “Restructure structures”

Common terms:

  • Tenure extension — loan tenure lengthened; EMI reduces.
  • Interest rate reduction — concession to relieve pressure.
  • Principal moratorium — borrower pays only interest for some period.
  • Combination of the above.
  • Step-up structure — small payments now, larger later when business recovers.

Approval

Section titled “Approval”
  • Credit committee approval typically required.
  • Board ratification for material restructures.

IRACP implications

Section titled “IRACP implications”
  • Standard asset restructured → immediately downgrades to NPA (with rare exceptions per special schemes).
  • Restructured-and-downgraded asset attracts higher provisioning per IRACP.
  • After observation period (typically 12 months of satisfactory performance), upgrade possible.
  • Re-restructuring during observation period → fresh stress event; further downgrade.

Evergreening trap

Section titled “Evergreening trap”

Common evergreening pattern:

  • Loan #1 issued; borrower struggles.
  • Loan #2 issued ostensibly for fresh purpose but actually to clear Loan #1.
  • Borrower keeps both loans on books temporarily; pays from Loan #2 to Loan #1.
  • Defaults overall later, but classification timing artificially looks clean.

RBI is strict on evergreening. Internal audit must look for patterns:

  • Restructure followed shortly by fresh sanction.
  • Multiple loans to same borrower with overlapping cash-flow logic.
  • Restructured-then-paid loans within months.

If audit detects evergreening pattern, regulator action likely.

Special restructuring schemes

Section titled “Special restructuring schemes”

Time-bound RBI windows (Covid Resolution Framework etc.) allow restructuring without downgrade. When in force:

  • Eligibility criteria specific.
  • Concessions allowed.
  • Periodic regulatory reporting required.

Check current scheme availability at restructure decision time.

Decision matrix — settle vs restructure vs pursue

Section titled “Decision matrix — settle vs restructure vs pursue”
ScenarioRecommended action
Borrower has temp distress + credible recovery plan + supports legal pressureRestructure (within special scheme if active)
Borrower has lump sum but lacks ongoing businessSettle (OTS)
Borrower has business + cash flow but avoiding paymentPursue legal + leverage of Section 138 / SARFAESI / IBC
Borrower’s business closed; only PG assets remainPursue legal for PG assets recovery
Asset disputed + uncertainSettle at meaningful haircut
Borrower in IBC / NCLTEngage with CoC / RP for IBC resolution
Borrower deceasedPursue against estate / heirs per applicable succession

Fraud check before settlement

Section titled “Fraud check before settlement”

Mandatory before any material settlement:

  • Recent asset transfers of borrower / promoter (suggests asset hiding).
  • Bureau refresh — new loans elsewhere?
  • Pre-existing IBC / DRT proceedings against borrower elsewhere (other creditors).
  • Borrower’s other businesses’ MCA filings — active or stagnant.
  • Property tax / utility bills showing continued occupancy of claimed-distressed premises.

A settlement is a closure; ensure no smoking gun before agreeing.

Borrower communication

Section titled “Borrower communication”
  • Settlement / restructure offers communicated in writing.
  • Borrower acknowledges in writing.
  • KFS-like disclosure of revised terms for restructure.
  • Bureau impact explained at settlement (especially “Settled” flag).

Write-off vs settlement

Section titled “Write-off vs settlement”
  • Settlement: borrower pays an agreed lump sum; loan closed; haircut written off.
  • Write-off without settlement: lender recognises loss without borrower paying anything; continues legal pursuit.

Choose write-off when settlement isn’t realistic + legal recovery is uncertain. Write-off is accounting, not legal — recovery rights continue.

What the platform must build

Section titled “What the platform must build”
  • Settlement workflow with approval matrix.
  • Restructure workflow as long-running process via workflow engine.
  • Observation-period tracker for restructured loans.
  • Settlement offer generator with templates.
  • Bureau reporting automation for settled loans (flag “Settled”).
  • Audit trail per decision.
  • Anti-evergreening checks — flag suspicious patterns.

Compliance touchpoints

Section titled “Compliance touchpoints”
  • IRACP — restructure / settlement classification + provisioning rules.
  • Board policy — settlement matrix + restructure criteria board-approved.
  • Fair Practices Code — borrower communication standards.
  • Bureau reporting — accurate flag on settled / restructured loans.
  • DPDP — settlement-negotiation data is sensitive.
Section titled “Related”