OTS Finance In India: NPA Settlement, Funding Options, Eligibility & Process For MSMEs

When a business loan becomes difficult to repay, the financial pressure can extend beyond the outstanding loan amount. Interest, recovery proceedings, collateral-related concerns, and cash-flow problems can make the situation even more challenging.

One possible resolution route is a One-Time Settlement (OTS) with the existing bank or financial institution. However, even when a lender agrees to accept a negotiated settlement amount, the borrower may not have enough funds to pay it within the required deadline.

This is where OTS Finance can become relevant.

OTS Finance helps eligible businesses explore funding arrangements to pay an agreed settlement amount to an existing lender. For MSME owners, business promoters, and corporate borrowers, understanding the settlement process, funding requirements, and associated risks is essential before taking the next step.

In this guide, we explain how OTS Finance works in India, available funding options, eligibility requirements, necessary documents, and the process of resolving an NPA account.

What Is OTS Finance in India?

OTS Finance, also known as One-Time Settlement Finance, refers to a funding arrangement used to help a borrower pay an agreed One-Time Settlement amount to an existing bank or financial institution.

A one-time settlement is a negotiated arrangement in which the existing lender agrees to accept a specified amount to settle its claims against the borrower, subject to agreed conditions.

OTS Finance and OTS are two different things:

• OTS: The settlement agreement between the borrower and the existing lender.

• OTS Finance: The funding arrangement used to arrange money for paying the settlement amount.

Example of How OTS Finance Works

Suppose a company has an outstanding bank liability of ₹5 crore. After reviewing the account and the borrower's proposal, the bank agrees to accept ₹3 crore as a full and final settlement, subject to specific conditions.

However, the company does not have ₹3 crore available immediately.

It approaches an OTS funding provider. The provider evaluates the company's financial position, available property or other acceptable security, legal status, and repayment capacity.

If the proposed financing is approved, the funds may be used to pay the existing bank's settlement amount. The borrower then repays the new financier according to the terms of the new financing agreement.

The important distinction: OTS is the settlement agreement with the existing lender. OTS Finance is the funding arrangement used to meet that agreement.

OTS funding is not a government loan waiver or an automatic RBI subsidy. It is a financing solution subject to lender approval, due diligence, and commercial terms.

For businesses that need funding support for stressed or non-performing accounts, explore Credit Curators' Distressed Account Funding solutions.

How Does One-Time Settlement Work Under RBI Guidelines?

In banking, one-time settlement is generally referred to as a compromise settlement.

The Reserve Bank of India recognizes compromise settlements as a resolution mechanism for stressed accounts. Regulated lenders must follow applicable RBI directions and their own Board-approved policies when considering such settlements.

The RBI issued its Framework for Compromise Settlements and Technical Write-offs on 8 June 2023. On 28 November 2025, it issued updated Resolution of Stressed Assets Directions for different categories of regulated entities.

Borrowers should refer to the directions applicable to their particular lender instead of assuming that every bank, NBFC, or financial institution follows identical procedures.

Important points to understand:

• A borrower does not have an automatic right to receive an OTS offer.

• The existing lender evaluates the proposal under its applicable policy.

• The settlement amount and conditions depend on the account and lender's assessment.

• A written settlement approval is important before arranging funds.

• A compromise settlement does not automatically end separate legal or criminal proceedings, where applicable.

Useful official resources:

• RBI – Commercial Banks: Resolution of Stressed Assets Directions, 2025

• RBI – NBFCs: Resolution of Stressed Assets Directions, 2025

• RBI – Official website

The applicable framework can differ according to the type of regulated lender. Always verify the current directions before relying on a regulatory provision.

What Is the Difference Between NPA, OTS, OTS Funding, and Debt Restructuring?

These terms are related, but they describe different aspects of a distressed loan.

Term	Meaning
NPA	A loan account classified as a nonperforming asset under applicable regulatory norms
OTS	A negotiated settlement between a borrower and the existing lender
OTS Funding	Financing arranged to pay the agreed settlement amount
NPA Funding	Funding intended to address an existing stressed or NPA liability
Debt Restructuring	Modification of existing loan terms, such as repayment schedule, tenure, or other conditions

For commercial banks, a term loan generally becomes an NPA when principal or interest remains overdue for more than 90 days, subject to applicable regulatory provisions. Cash credit and overdraft accounts follow separate out-of-order criteria.

Read the relevant RBI regulatory information for the applicable asset-classification requirements.

Why Do Businesses Consider OTS Finance?

Businesses may consider OTS when their existing loan obligations have become difficult to service and the lender is willing to evaluate a negotiated settlement.

1. Business Cash-Flow Problems

A reduction in revenue can make regular loan repayments difficult. Delayed customer payments, operating losses, or reduced working capital may contribute to repayment stress.

2. MSME Financial Difficulties

Small and medium-sized businesses can face financial pressure due to market changes, rising operating costs, delayed receivables, or unexpected business disruptions.

3. Corporate Debt and Multiple Lenders

Companies with loans from multiple banks or financial institutions may need a coordinated approach to resolve their outstanding liabilities.

4. Recovery and Legal Proceedings

A borrower facing recovery action may explore a negotiated settlement, depending on the lender's willingness and the legal status of the account.

5. Insufficient Funds for an Approved Settlement

Sometimes, a bank agrees to a settlement amount, but the borrower cannot arrange the required lump sum within the specified deadline. OTS funding may be explored to address this funding gap.

Businesses facing early financial stress may also explore Stressed Account Funding before their situation progresses further.

What Funding Options Are Available for an OTS Settlement?

The right funding structure depends on the borrower's financial position, available security, settlement deadline, and ability to repay fresh borrowing.

1. OTS Finance Through an NBFC or Financial Institution

An eligible borrower may approach a bank or NBFC that is willing to evaluate the proposed transaction.

The lender may assess the approved settlement amount, collateral, business financials, repayment source, and legal position before making a decision.

2. Private Credit and Structured Finance

Some borrowers explore private credit providers or structured finance arrangements when conventional financing is not suitable.

Such arrangements may involve property or other acceptable security. The borrower should verify the identity and legal status of the funding entity and carefully review the financing agreement.

3. Loan Against Property

A business promoter may explore secured borrowing against residential, commercial, or industrial property, subject to lender acceptance.

The amount that can be raised depends on property valuation, ownership, existing charges, title verification, and the lender's policies.

Using property as collateral creates a fresh repayment obligation and a potential enforcement risk if the new loan is not repaid.

4. Promoter Contribution or Asset Sale

External borrowing is not always necessary or appropriate.

A promoter may arrange funds through personal capital, an investor contribution, or the sale of a non-core business asset.

Combining internal funds with external financing may reduce the amount of fresh debt required.

5. Partial OTS Funding

If the borrower can arrange part of the settlement amount independently, the remaining requirement may be evaluated for external funding.

However, the arrangement must match the existing lender's written settlement conditions. A partial payment does not automatically mean that the lender will close the account or release its security.

Explore NPA Funding and Distressed Account Funding to understand the funding support available for distressed accounts.

Who Is Eligible for OTS Finance?

There is no single universal eligibility formula for every OTS funding transaction in India. Each financier follows its own credit policy, security requirements, and risk assessment.

However, the following factors are commonly relevant.

1. Written OTS Approval

A written settlement offer from the existing bank is a useful starting point.

It should clearly mention:

• The agreed settlement amount.

• Payment deadline and schedule.

• Conditions for accepting the settlement.

• Consequences of missing the deadline.

• Treatment of existing security and legal proceedings.

2. Acceptable Collateral

Many distressed-asset funding transactions involve secured lending.

A financier may evaluate residential or commercial property, industrial land, buildings, or other acceptable assets.

The lender will also examine ownership, title documents, existing mortgages, liens, encumbrances, and the property's realizable value.

A high property valuation alone does not guarantee funding approval.

3. Business Cash Flow and Repayment Capacity

The borrower should have a credible source of repayment for the proposed new financing.

A financier may examine business income, operating cash flow, rental income, documented alternative income or a realistic asset-sale plan.

4. Legal and Financial Position

The proposed financier may review:

• Existing bank liabilities and loan statements.

• NPA classification and account history.

• SARFAESI notices and recovery proceedings.

• DRT or NCLT proceedings, where applicable.

• Pending litigation and ownership disputes.

• Personal and corporate guarantees.

• Existing security interests.

A pending legal proceeding does not automatically make a borrower eligible or ineligible. Its implications must be assessed individually.

5. Repayment Feasibility

A borrower may have valuable property but insufficient income to repay a new loan.

The financier therefore needs to evaluate both the available security and the actual repayment source.

A funding proposal should remain financially sustainable even after the existing NPA is settled.

What Is the Process for Getting OTS Funding?

OTS funding generally involves coordination between the borrower, the existing lender and the proposed funding provider.

Step 1: Review the Existing Loan Account

Obtain the latest loan statement and understand the total outstanding liability.

Review the principal, interest, penalties, legal charges, account classification and details of secured assets.

Step 2: Approach the Existing Bank for OTS

Submit a written settlement proposal explaining the business's financial position and the amount it can realistically arrange.

Support the proposal with relevant financial documents and a clear explanation of the settlement funding plan.

Step 3: Obtain Written OTS Approval

If the bank accepts the proposal, obtain the formal settlement letter.

Read the amount, payment schedule, expiry date, conditions, security treatment and consequences of non-payment carefully.

Do not rely only on verbal assurances.

Step 4: Approach an OTS Funding Provider

Share the approved settlement letter and relevant financial information with a suitable funding provider.

The provider evaluates whether the proposed transaction fits its lending criteria.

Step 5: Complete Due Diligence

The financier may examine the borrower's financial statements, property documents, collateral value, title, legal position and repayment source.

Review all proposed financing terms, including interest, processing fees, tenure, security and repayment schedule.

Step 6: Arrange and Complete the Settlement Payment

Once the funding is sanctioned and all disbursement conditions are fulfilled, the money is released according to the financing agreement.

The payment must reach the existing lender within the settlement deadline and in accordance with the settlement letter.

Step 7: Obtain Closure and Security Release Documents

After fulfilling the settlement conditions, obtain written confirmation from the existing lender.

Depending on the transaction, relevant documents may include:

• Full and final settlement confirmation.

• No Dues Certificate or applicable NOC.

• Loan closure confirmation.

• Release of mortgage or other security interests.

• Return of original property documents, where applicable.

• Satisfaction of applicable charge-registration requirements.

Remember that the new financing agreement may create separate repayment and security obligations.

What Documents Are Required for OTS Funding?

Documentation varies by lender and transaction. However, borrowers can prepare the following information before approaching a funding provider.

Category	Documents
Identity	PAN, Aadhaar or other accepted KYC documents
Business	Incorporation documents, partnership deed or relevant constitution documents
Existing loan	Sanction letter, loan statements and outstanding liability details
OTS	Bank-approved settlement letter and payment schedule
Financials	Audited financial statements, balance sheets and profit-and-loss statements
Banking	Recent bank statements and relevant transaction records
Property	Title deed, ownership records and valuation reports
Security	Existing mortgage details, encumbrance information and charge documents
Legal	SARFAESI notices, court notices, DRT/NCLT documents and pending litigation details
Repayment	Cash-flow projections and supporting income documentation

For larger corporate transactions, the financier may also request group-company liabilities, guarantees, project details and promoter contribution information.

What Are the Risks of OTS Finance?

OTS funding can help a business meet a negotiated settlement obligation, but it does not eliminate financial risk.

Before entering into a new financing arrangement, borrowers should understand the following points.

1. Additional Interest and Borrowing Costs

The borrower may settle the original loan for an agreed amount but will still need to repay the new financier with applicable interest and charges.

Compare the total repayment obligation rather than focusing only on the initial funding amount.

2. Risk of Losing Collateral

If the borrower defaults on the new financing arrangement, the new secured lender may enforce its rights against the collateral in accordance with the agreement and applicable law.

3. Settlement Deadline Risk

An OTS letter contains specific payment conditions. If the borrower cannot arrange funds within the permitted period, the offer may lapse or require fresh approval.

Do not assume that an extension will automatically be granted.

4. Credit History Implications

An OTS is not the same as normal repayment of the original loan.

The borrower should confirm how the account will be reported to the relevant credit information companies. A settled account should not be represented as a normally closed account without confirmation.

5. Legal Recovery Proceedings

Under Section 13(2) of the SARFAESI Act, a secured creditor may issue a written demand notice requiring the borrower to discharge the secured liability within 60 days, subject to the Act's provisions.

OTS discussions do not automatically suspend SARFAESI enforcement or other legal proceedings.

Borrowers facing possession notices, auction proceedings or other legal action should obtain appropriate legal advice and written confirmation of any agreed standstill or withdrawal of proceedings.

Read the SARFAESI Act, 2002 for the statutory framework.

OTS Finance vs Debt Restructuring: Which Is Better?

OTS and debt restructuring are different approaches to resolving financial stress.

Factor	One-Time Settlement	Debt Restructuring
Main purpose	Settle the existing lender's claims on agreed terms	Modify existing loan terms
Payment structure	Usually a negotiated settlement payment	Revised repayment schedule
Loan status	Settlement subject to lender confirmation and reporting	Existing debt continues under revised terms
Suitable situation	Borrower can arrange settlement funds	Business has potential to service revised repayments
Key consideration	Availability of settlement funds	Long-term repayment capacity

If a business has a realistic recovery plan and can service revised loan terms, restructuring may be worth exploring.

If a negotiated settlement is available and the borrower can arrange the required funds, OTS may be considered.

The appropriate option depends on the borrower's financial and legal position.

For businesses that need help evaluating settlement or restructuring options, explore Credit Curators' Advisory & Incubation services.

Common Mistakes Businesses Should Avoid

A distressed borrower is already under financial pressure. A poorly evaluated funding proposal can make the situation worse.

Avoid these common mistakes:

• Assuming OTS approval is guaranteed: The existing lender makes its own decision under its applicable policy.

• Approaching a financier without understanding the settlement amount: The actual funding requirement should be clear.

• Ignoring property ownership issues: Disputed titles or existing charges can delay or prevent financing.

• Accepting unclear funding terms: Understand the interest rate, fees, repayment period and security conditions.

• Depending on an unverified funding promise: Verify the actual funding entity and obtain documented terms.

• Ignoring repayment capacity: The business needs a workable financial position after settlement.

• Assuming legal proceedings will stop automatically: Obtain written confirmation and appropriate legal advice.

Frequently Asked Questions About OTS Finance

1. What is an NPA finance company?

An NPA finance company is a general term used for a financial institution or funding provider that evaluates financing requirements connected with stressed or non-performing loan accounts.

Depending on its business model and regulatory status, a provider may offer funding, advisory support or structured finance solutions. Borrowers should verify the entity's legal status and the exact nature of its services.

2. Is NPA funding available if I cannot arrange the OTS amount?

Funding may be available for eligible borrowers through suitable lenders or private credit arrangements. Approval depends on factors such as collateral, repayment capacity, legal position and the proposed financing structure.

It is not guaranteed, and borrowers should compare the total cost of new borrowing before proceeding.

3. Can a bank reject an OTS proposal?

Yes. A bank or financial institution can reject an OTS proposal based on its applicable policy, assessment of the account and commercial considerations. Borrowers do not have an automatic right to demand a particular settlement amount.

4. Can OTS happen after a SARFAESI notice?

A borrower may explore a settlement even after receiving a SARFAESI notice. However, settlement discussions do not automatically stop enforcement action. Obtain written settlement terms and appropriate legal advice before relying on any proposed arrangement.

5. What does an ARC do, and can borrowers negotiate with it?

An Asset Reconstruction Company (ARC) may acquire financial assets from banks and other financial institutions under applicable law. If an ARC becomes the creditor for an account, the borrower may approach it with a settlement proposal.

Any settlement remains subject to the ARC's applicable policy and approval process.

6. What is the difference between debt settlement and financial restructuring?

Debt settlement involves a negotiated arrangement to settle the lender's claims on agreed terms. Financial restructuring modifies the existing loan terms, such as repayment tenure, instalments or other conditions.

The better option depends on whether the business can realistically repay revised debt or arrange the settlement amount.

7. Does OTS remove an NPA record from my credit history?

Not automatically. The account's reporting treatment depends on the lender's reporting and applicable credit information rules. Borrowers should obtain written confirmation of the account status and check their credit report after the settlement is completed.

8. Can OTS happen when a company is undergoing CIRP under the IBC?

A company undergoing the Corporate Insolvency Resolution Process (CIRP) is subject to the Insolvency and Bankruptcy Code and the authority of the NCLT and insolvency professional. A settlement proposal in such a situation requires careful legal assessment and must comply with the applicable insolvency framework.

Do not assume that an ordinary OTS process can proceed independently of CIRP.

Explore OTS Finance and NPA Funding with Credit Curators

A distressed loan requires a transaction-specific assessment. The settlement amount, collateral position, legal status and repayment capacity all influence whether an OTS funding proposal is workable.

Credit Curators works in the corporate finance and debt-resolution space, helping businesses explore funding and resolution requirements for distressed accounts.

If your company is facing an NPA liability or has received a bank-approved One-Time Settlement offer, you can share the relevant financial and settlement details for an initial assessment.

Before arranging fresh funding, establish three things:

1. What amount the existing bank is willing to accept.

2. What security or other funding sources are available.

3. How the new borrowing will be repaid.

Explore your options with Credit Curators for OTS Finance, NPA Funding and distressed account funding requirements.