The Reserve Bank of India (RBI) regulates the loan recovery and compromise settlement process in India. Understanding these guidelines protects you from illegal collection actions and ensure a transparent settlement process.
The RBI OTS Framework
The RBI has issued a circular "Prudential Framework for Resolution of Stressed Assets - Compromise Settlements and Technical Write-offs" in June 2023. This framework establishes the rules for banks and NBFCs when resolving stressed loan accounts.
Key Takeaways
- Board policies: Lenders must implement board-approved policies for compromise settlements.
- Cooling-off: Borrowers who settle a loan face a mandatory 12-month cooling-off period before they can apply for fresh loans with the same bank.
- NOC report: Lenders must report closed/settled status to credit bureaus within 30 days of final payment.
Key Rules on Compromise Settlement
Under RBI rules, banks can enter into compromise settlements with standard, sub-standard, doubtful, or loss assets. Lenders must establish a clear delegation of authority for OTS approvals. The settlement amount must be determined based on the net present value (NPV) of the recovery prospects and collateral value.
Understanding the Cooling-off Period
The 12-month cooling-off period applies to home, vehicle, or personal loans after an OTS. During this period, banks are prohibited from approving fresh credit limits or loans to the settled borrower. After 12 months, borrowers can apply for new credit, subject to underwriting policies and CIBIL score recovery.
Borrower Checklist
- [ ] Verify if your bank has launched an active OTS scheme.
- [ ] Review CIBIL reports to confirm outstanding balance is zero after settlement.
- [ ] Keep all original legal notice envelopes and letter sheets.
- [ ] Contact SettleXpert for support in negotiating under RBI guidelines.
