One-Time Settlements Formalised: RBI 2023 Framework on Compromise Settlements and Write-Offs

When the Reserve Bank of India issued its Framework for Compromise Settlements and Technical Write-offs on 8 June 2023 (circular RBI/2023-24/40), it settled a decade of ambiguity over whether a bank may legitimately accept less than the full amount due from a defaulting borrower. The answer is now unambiguous: a regulated entity may negotiate a cash settlement that involves a sacrifice of dues, provided the arrangement follows a board-approved policy. This article maps that 2023 framework onto the older recovery statutes a borrower actually faces at the counter - the SARFAESI Act 2002, the Recovery of Debts and Bankruptcy Act 1993, and the Insolvency and Bankruptcy Code 2016 - and sets out where a borrower's defences begin and end.

For a household running the arithmetic before it approaches a lender, the debt-consolidation calculator and the foreclosure calculator show what a full closure would cost against a negotiated settlement, so the sacrifice figure a bank quotes can be measured against the alternative.

The Statutory Position

The 2023 framework defines a compromise settlement as "any negotiated arrangement with the borrower to fully settle the claims of the regulated entity against the borrower in cash", which may involve a sacrifice of the amount due with a corresponding waiver of claims. It is distinct from a technical write-off, which the same circular describes as an account written off "only for accounting purposes, without involving any waiver of claims" and without prejudice to recovery. The distinction matters because a technical write-off dated any year does not extinguish the borrower's liability; only a completed compromise settlement does.

Under Clause 6 of the RBI/2023-24/40 framework, the authority approving a compromise settlement must sit "at least one level higher in hierarchy than the authority vested with power to sanction the credit", and the officer who originally sanctioned the loan cannot approve the settlement of that same account. Clause 7 adds that where the settlement's payment terms stretch beyond three months, the arrangement is treated as a restructuring under the existing Prudential Framework rather than a clean compromise.

The recovery machinery a borrower encounters, however, predates 2023 by two decades. The following table sets out the three statutes and the trigger for each.

The SARFAESI route is the one most borrowers meet first because it lets a secured creditor act without approaching a court. Section 13(2) of the SARFAESI Act 2002 requires the creditor to issue a 60-day notice once the account is classified as a non-performing asset. Section 13(3A), inserted by the 2004 amendment, gives the borrower the right to make a representation against that notice, and obliges the creditor to reply with reasons within 15 days. Only after the 60 days lapse without compliance may the creditor move under Section 13(4) to take possession, sell, lease, or appoint a manager over the secured asset.

For the Insolvency and Bankruptcy Code 2016 route, the threshold is far higher: a financial creditor's application under Section 7 requires a default of at least Rs 1 crore, a figure raised from Rs 1 lakh by a 2020 notification. That single change took the vast majority of retail and small-business borrowers outside the IBC entirely, leaving SARFAESI and the RDDB Act 1993 as the practical battleground.

Where a compromise settlement fits into this map is a question of sequence rather than statute. The 8 June 2023 framework does not amend SARFAESI, the RDDB Act 1993, or the IBC 2016; it sits above all three as an RBI direction on how a regulated entity may conclude a negotiated exit while any of those recovery actions is running. So a borrower can be inside a live Section 13(4) SARFAESI process and still table a settlement, because Clause 13 of RBI/2023-24/40 permits settlement even for the hardest categories of account, subject only to board approval and the governance conditions the circular prescribes.

Procedure Step by Step

A compromise settlement rarely arrives in isolation. It usually runs alongside, or in response to, a live SARFAESI or Debts Recovery Tribunal action. The sequence below sets out the combined procedure from the first notice to a completed settlement.

1. NPA classification and the 60-day notice. The account is classified as an NPA, and the secured creditor issues the Section 13(2) notice of the SARFAESI Act 2002, giving 60 days to clear the dues.
2. Representation under Section 13(3A). Within that 60-day window the borrower may file a written representation. The creditor must respond with reasons within 15 days; a non-reply is itself a procedural defect the borrower can raise later.
3. Table the settlement proposal. The borrower submits a one-time settlement proposal. Under Clause 6 of RBI/2023-24/40, it must be decided by an authority one level above the original sanctioning authority, and never by the sanctioning officer.
4. Board-approved policy check. The regulated entity assesses the proposal against its board-approved compromise-settlement policy, which under the 8 June 2023 framework must specify minimum ageing, extent of collateral deterioration, and staff-accountability conditions.
5. Section 13(4) measures, if talks fail. If no settlement is reached after the 60 days, the creditor may take symbolic or physical possession under Section 13(4).
6. Magistrate's assistance under Section 14. To take physical possession, the creditor applies to the Chief Metropolitan Magistrate or District Magistrate under Section 14, which since the 2016 amendment carries a 30-day disposal mandate.
7. Execute and document the settlement. Once approved, the borrower pays the agreed cash amount. The framework treats the arrangement as a full settlement only when the RE's claims are settled in cash; instalment terms beyond three months convert it into a restructuring under Clause 7.
8. Observe the cooling period. For non-farm exposures, the 2023 framework imposes a minimum cooling period of 12 months before the borrower may be granted fresh credit, and permits the RE to set a longer floor.

The prepayment-benefit calculator is useful at step 3, because a borrower weighing a lump-sum settlement against continued servicing needs to know the interest saved by closing the account early rather than dragging it to a Section 13(4) sale.

Borrower Defences Available

The defences fall into two families: procedural challenges to the recovery action, and the appellate pre-deposit route. Neither creates a right to a settlement, but both buy time and leverage.

The first defence is procedural. Because Section 13(3A) of the SARFAESI Act 2002 obliges the creditor to reply to a representation within 15 days with reasons, a failure to do so is a recognised ground to challenge the subsequent Section 13(4) action. Similarly, possession taken before the 60-day notice period under Section 13(2) expires is defective on its face.

The second defence is the statutory appeal, and here the numbers govern everything. A borrower aggrieved by a Section 13(4) measure appeals to the Debts Recovery Tribunal under Section 17 of the SARFAESI Act 2002 within 45 days; no pre-deposit is mandatory at this first stage, though the tribunal may direct one. The onward appeal to the Debts Recovery Appellate Tribunal under Section 18 is where the money bites. The table below compares the pre-deposit rules across the forums, because borrowers routinely confuse the SARFAESI scheme with the RDDB Act scheme.

The contrast is stark. Under SARFAESI Section 18, the borrower must deposit 50% of the debt due, which the appellate tribunal may reduce to no lower than 25% for reasons recorded in writing. Under the RDDB Act 1993 the pre-deposit is heavier still: Section 21 requires 75% of the amount of debt due before a DRAT appeal is entertained, though the tribunal may waive or reduce it for reasons recorded in writing. A borrower who mistakes the 50% SARFAESI figure for the 75% RDDB figure can lose an appeal on limitation while arranging the wrong sum.

A third avenue is the settlement itself. The 8 June 2023 framework expressly permits compromise settlements for accounts classified as wilful defaulters or fraud, "without prejudice to the criminal proceeding underway", under Clause 13, subject to board approval. This does not exonerate the borrower, and it does not stop a live criminal case, but it removes the older blanket bar that once kept such accounts outside settlement entirely. A borrower comparing the cost of a contested Section 17 appeal against a negotiated exit can model the two paths with the debt-consolidation calculator before committing.

Recent Tribunal/HC Position

The decisive authority remains The Bijnor Urban Cooperative Bank Limited v. Meenal Agarwal, decided by the Supreme Court of India in Civil Appeal No. 7411 of 2021 on 15 December 2021. The Court held in plain terms that "no borrower can, as a matter of right, pray for grant of benefit of One Time Settlement Scheme." It quashed a High Court direction that had ordered the bank to consider the borrower's OTS application, holding that a bank may lawfully refuse a settlement where it reasonably believes full recovery is achievable through auction or other measures.

That holding survives the 2023 framework intact. Nothing in RBI/2023-24/40 dated 8 June 2023 converts a compromise settlement into an enforceable borrower entitlement; the circular sets the governance rails for the lender's discretion, requiring board-approved policies and an approver one level above the sanctioning authority under Clause 6, but it does not oblige any regulated entity to accept a proposal. Read together, the 15 December 2021 judgement and the 2023 framework leave the commercial decision with the lender while disciplining how that decision is taken.

The practical consequence for a borrower is that litigation to compel a settlement will fail, but litigation to enforce procedure - a missing Section 13(3A) reply within 15 days, or possession taken before the 60-day Section 13(2) notice expired - remains live. The 12-month cooling period the framework imposes on fresh non-farm credit after settlement is also now a fixed cost the borrower must plan around, not a negotiable term.

There is a corollary that borrowers frequently miss. Because Clause 6 of the 8 June 2023 framework bars the officer who sanctioned a loan from approving its settlement, and requires an approver one level higher in the hierarchy, a settlement offer that has cleared the correct authority carries institutional weight that an informal branch-level assurance does not. A written offer decided at the wrong level is not a binding settlement, and a borrower who pays against such an assurance without the board-approved sign-off risks paying into an account that remains fully due. The safest reading of the 2023 framework is therefore procedural: insist on documentation that identifies the approving authority and confirms the cash amount settles the claim in full, rather than an instalment plan that Clause 7 would reclassify as a restructuring once it runs beyond three months.

FAQ

Does the RBI 2023 framework give me a right to a one-time settlement?

No. Under the Supreme Court's ruling in Bijnor Urban Cooperative Bank v. Meenal Agarwal, decided on 15 December 2021, no borrower can claim a one-time settlement as a matter of right. The 8 June 2023 framework (RBI/2023-24/40) governs how a lender may grant a settlement but does not compel it to.

Can a wilful defaulter or a fraud-classified account be settled?

Yes. Clause 13 of the RBI framework dated 8 June 2023 permits compromise settlements for accounts classified as wilful defaulters or fraud, but only with board approval and "without prejudice to the criminal proceeding underway". The settlement does not stop or dilute an ongoing criminal case.

How long must I wait for fresh credit after a settlement?

For non-farm exposures, the RBI/2023-24/40 framework imposes a minimum cooling period of 12 months before a regulated entity may extend fresh credit, and the entity is free to set a longer period under its board-approved policy.

What deposit must I pay to appeal a SARFAESI order?

An appeal to the Debts Recovery Tribunal under Section 17 of the SARFAESI Act 2002 carries no mandatory pre-deposit, though the tribunal may direct one within the 45-day limitation. The onward appeal to the DRAT under Section 18 requires 50% of the debt due, which may be reduced to not less than 25% for reasons recorded in writing.

How is the RDDB Act pre-deposit different?

Under Section 21 of the RDDB Act 1993, an appeal to the DRAT is not entertained unless 75% of the debt due is deposited, though the tribunal may waive or reduce it for reasons recorded in writing. This is heavier than the 50% SARFAESI figure, and borrowers should not conflate the two.

What is the difference between a compromise settlement and a technical write-off?

Per the 8 June 2023 framework, a compromise settlement fully settles the lender's claims in cash and may involve a sacrifice with a waiver of claims, whereas a technical write-off is an accounting entry made "without involving any waiver of claims". A technical write-off leaves your liability intact and recovery can continue.

Can I be evicted before the 60-day SARFAESI notice ends?

No. Section 13(4) measures, including possession, may be taken only after the 60-day period in the Section 13(2) notice lapses without compliance. Possession before that, or a failure by the creditor to reply to your Section 13(3A) representation within 15 days, is a procedural defect you can raise before the Debts Recovery Tribunal.