One Time Settlement Schemes (OTS)
Prompt recovery of loans and advances not only increases liquidity and profitability but also keeps funds cycle moving by continuous lending for the development of the economy. Compromise Policy is a step in this direction. The compromise should be a negotiated settlement under which it should be ensured to recover its dues to the maximum extent possible with a minimum sacrifice. The important aspect in connection with settlement proposals is the concept of opportunity cost of funds. The opportunity cost of funds in hand vis-à-vis that of funds, which could come in hand at a later period should be calculated to establish a comparative advantage of ‘now or later’. The guiding factors for a compromise settlement are:
- Balance outstanding in the account (real account) as on date of NPA.
- Provision held in the account.
- Market value of the securities and time taken for realizing it.
- Reasons for failure i.e. factors beyond borrower’s control like natural calamities.
- Present status of the account and the amount that can be recoverable.
Our Bank introduced a Comprehensive Corporate Compromise Policy (CCCP) and the salient features of the policy are furnished here under:
- These guidelines are applicable to NPAs and Technically Written-off accounts including Credit Card dues.
- The account should have been classified as Substandard asset as at the end of previous quarter for settlement. All the limits enjoyed by the borrower either with the same branch or with different branches are also settled simultaneously.
- It also covers dues of employees/officers who cease to be in service on account of retirement/death/resignation/dismissal/discharge/compulsory retirement may be treated on par with general public.
- Compromise settlement may be entered with willful defaulters/fraudulent borrowers without prejudice to the criminal case against the borrower and those cases of compromise settlement should be vetted by Management Committee/Board of the Bank.
- Bank may also entertain compromise proposal from the borrowers (in justifiable cases) on whom SARFAESI notices are served for taking possession of securities, provided the borrower comes forward for a compromise proposal.
- Committee approach is to be adopted while according compromise approvals. The committee should give justifying reasons for consideration of the compromise while referring the proposal to the competent authority for consideration. An official who has sanctioned a particular loan, which has become NPA shall not participate in the compromise committee meeting where the proposal relating to that loan is under consideration for settlement.
- To impart further transparency especially with regard to high value compromise accounts, the proposals need to be vetted by Settlement Advisory Committee constituted by three independent members viz., Retired Judge, Retired ED/CMD of a Bank and Retired General Manager of a Bank.
- Administrative clearance is required from Head Office, where the write-off exceeds 25% of real account balance in case of Sub-standard NPA accounts. However, this is not applicable with regard to Doubtful / Loss category accounts.
|Formula to rework out Shadow Account|
|Non Suit-filed Accounts||Real account balance + Interest at prevailing BMPLR or contracted rate whichever is lower on simple basis from the date of cessation of interest / NPA date whichever is earlier, until the preceding month + any other charges.|
|Suit-filed accounts not decreed||Real account balance + Interest at prevailing BMPLR or contracted rate whichever is lower on simple basis from the date of cessation of interest / NPA date whichever is earlier, until the preceding month + Suit expenses + any other charges.|
|Suit-filed accounts decreed||Real account balance + Interest at prevailing BMPLR or contracted rate whichever is lower on simple basis from the date of cessation of interest / NPA date whichever is earlier, until the preceding month + Law charges incurred after date of suit + any other charges.|
|Note: As and when BMPLR is phased out, from the date of such phase out, notional interest shall be calculated at prevailing Base Rate + 4%.|
The Net Present Value (NPV) of the compromise amount as well as realizable value of securities may be arrived as under:
A – Fair Market value of the security
B – Less – Costs / Expenses for realization of securities
C – Total value (A-B)
D – Net Present value of I discounted at existing Base Rate+4% for 3 Years
E – Total amount of compromise – Payment of compromise amount due on (where payable in installments)
F – Net Present Value of the compromise amount discounted at existing Base Rate+4% Simple for the period of payment
It should be ensured that NPV of the compromise amount discounted at existing Base Rate + 4% simple i.e. F should generally be not less than the NPV of the realizable value of securities i.e. D.
Mode of Payment: As far as possible, before entertaining the proposal, it should be ensured that the borrower makes upfront payment of at least 10% of compromise amount. Payment of compromise amount within 30 days is desirable. If not a reasonable 90 days time may be given to the borrower for full payment in 2 to 3 installments. Depending on the case, borrower request for making payment within 12 months may be considered on the condition that 25% of compromise amount (including upfront amount) and the balance amount along with interest @ Base Rate + 4% (simple) from the date communication of compromise till the date of final payment. However, in any case the repayment period of compromise amount should not exceed 18 months. In case of delay in payment of compromise amount, interest is to be collected at current Base Rate + 4% + 2% spread on reducing balances from the date of sanction communication until the closure of the account. Branches are required to communicate in writing to the borrower the terms and conditions of the compromise approved and the date on which the compromise gets lapsed in case of failure of the borrower to pay the compromise amount in full. Proportionate release of securities could be considered on case-to-case basis. Branch should obtain commitment letter from the borrower that the sale proceeds are to be credited to the compromise account. (Circular No.351 Ref 45/07 dated 26.11.2012).
OTS for Small Loans: All NPA accounts including suit filed accounts but not decreed with real account balance of Rs.2.00 Lakh & below and classified as Doubtful/Loss Assets as on 31.03.2013 are eligible under the scheme. Accounts technically writtenoff on or before 31.03.2010 are also eligible under the scheme. Further, the scheme shall not cover cases of fraud and decreed accounts. It shall also not cover accounts backed by liquid securities or salary undertaking letters. The scheme is now made nondiscretionary and non-discriminatory. Settlement amount is linked to the date of NPA as under:
|Age of NPA||Settlement amount formula|
|Real a/c balance of below Rs.1 lakh||Real a/c balance of Rs.1 lakh & above and up to Rs.2 lakh|
|01.04.11 to 31.03.12||75% amount in default||80% amount in default|
|01.04.09 to 31.03.11||70% amount in default||75% amount in default|
|01.04.07 to 31.03.09||65% amount in default||70% amount in default|
|On or before 31.03.07||60% amount in default||65% amount in default|
|Technical w/off a/cs||45% amount in default||45% amount in default|
|Amount in default = Real account balance as on date of NPA + CGTMSE/ECGC claim received and appropriated Minus recoveries after date of NPA|
Cash Discount of 10% on the settlement amount is available where the borrower pays the amount in full at a time within 10 days of receipt of OTS offer letter from the Branch/Bank. Sanctioning authority of OTS proposal is Branch Manager and reviewing authority is Zonal Manager. The settlement amount arrived at as above, should be paid in one lump sum amount without interest within 30 days of sanction or in installments within 60 days, by collecting at least 25% of the settlement amount as down payment on case to case basis. This scheme is operative up to 31.12.2013. (Cir.no.270 Ref 45/09 dated 01.10.2013)
OTS for MSME Loans: The important features of the modified scheme are furnished hereunder (Cir. No. 269 Ref 45/8 dated 01.10.2013):
- Sub-Standard Accounts are not eligible under the present scheme
- NPA accounts, including Suit Filed accounts but not decreed, under Micro, Small & Medium Enterprises, with real balance of above Rs.2 lakh and up to Rs.10 crore as on 31.03.2012 and classified as Doubtful and Loss Assets, are eligible under the Scheme
- Accounts Technically Written Off on or before 31.03.2010 are eligible under the Scheme
- Small loans up to Rs.2 lakh under MSME shall be considered under Small Loans OTS scheme
The Settlement formula, based on the date of NPA, is as under:
|Real account balance> Rs.2 lakh and < Rs.10 lakh|
|Date of NPA||Settlement amount|
|01.04.11 to 31.03.12||90% of Amt. in default|
|01.04.09 to 31.03.11||85% of Amt. in default|
|01.04.07 to 31.03.09||75% of Amt. in default|
|On or before 31.03.07||65% of Amt. in default|
|Tech. Written off on or before 31.03.10||65% of Amt. in default|
|Date of NPA||Real account Balance => Rs.10 lakh and < Rs.1 crore||Real account Balance => Rs.1 crore & up to Rs.10 crore|
|01.04.10 to 31.03.12||95% of Amt. in default||Amt. in default|
|01.04.08 to 31.03.10||85% of Amt. in default||90% of Amt. in default|
|On or before 31.03.08||80% of Amt. in default||85% of Amt. in default|
|Tech. Written off on or before 31.03.10||80% of Amt. in default||85% of Amt. in default|
|Amt. in default = Real account balance as on date of NPA + CGTMSE/ECGC claim received and appropriated Minus recoveries after date of NPA|
In case of loan accounts with real liability of Rs.10 lakh and above as on the date of NPA, the settlement formula will be as above or Net Present Value (NPV) of available securities Primary as well as Collateral and Securities Attached by the court Before Judgement (ABJ), whichever is higher. NPV will be calculated with 3 years realization period at prevailing Base Rate + 4%. Cash Discount of 10% on the settlement amount is available where the borrower pays the amount in full immediately or within 10 days of receipt of OTS offer letter from the Branch/Bank.
Recovery Agents: All NPA accounts (including technical written-off accounts) with Real Account outstanding of Rs.5 lakh and above and which are more than 2 years old will be entrusted to the Recovery Agents. However, in exceptional cases the mandatory period of 2 years can be waived. The agency should be either Partnership or Corporate entity with required expertise to handle NPA accounts. The agents appointed under this scheme are required to be complied BCSBI code and Bank’s Model Code of conduct for collection of dues and repossession of secured assets. However, the agency shall not have any right to sub-delegate or appoint any subagent. The engagement of agent is account specific and for a specified period only. Bank also engaging the services of Investigation Agents for the purpose of locating the whereabouts of borrowers/guarantors or details of assets other than charged / mortgaged to the bank to expedite the process of recovery of suit filed accounts. (Cir. No.343 Ref 45/09 dated 27.01.10 & Cir.no.244 Ref 45/11 dated 01.10.10)