RBI 2023 Compromise Settlement Framework: How Borrowers Can Negotiate a One-Time Settlement

When a loan account slips into the non-performing category after 90 days of default under the Reserve Bank of India's Income Recognition and Asset Classification norms, most borrowers assume only two endings remain: repay the full outstanding, or lose the mortgaged asset to a lender exercising the SARFAESI Act, 2002. The RBI's Framework for Compromise Settlements and Technical Write-offs, issued through circular RBI/2023-24/40 dated 8 June 2023, formalises a third path — a negotiated one-time settlement (OTS) in which the lender accepts less than the full dues in cash and waives the balance.

For the first time, the 8 June 2023 framework applies one board-governed rule set across every Regulated Entity (RE) — commercial banks, cooperative banks, non-banking financial companies and All-India Financial Institutions. It also ended a long-running debate by confirming that even accounts tagged as wilful defaulter or fraud stay eligible for a compromise settlement, subject to board approval in every case and without prejudice to any criminal proceedings already under way.

This playbook sets out the exact statutory position, the step-by-step OTS procedure, the borrower defences preserved under SARFAESI and the Recovery of Debts and Bankruptcy Act, 1993, and the Supreme Court's 2021 position on whether a borrower can demand a settlement as of right. Every figure below is drawn from the RBI circular of 8 June 2023 or the governing statutes.

The Statutory Position

A compromise settlement, as defined in the RBI framework of 8 June 2023, is "a negotiated arrangement to fully settle the RE's claims in cash", with the Regulated Entity waiving part of the dues. It is deliberately distinct from a technical write-off, where the outstanding is written off at head-office level for balance-sheet presentation while the lender's recovery rights against the borrower survive in full.

The framework does not create the lender's recovery powers — those flow from three separate statutes that a defaulting borrower will meet in sequence. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 lets a secured creditor enforce security without a court order; the Recovery of Debts and Bankruptcy Act, 1993 routes money suits through a Debt Recovery Tribunal; and the Insolvency and Bankruptcy Code, 2016 governs corporate and personal insolvency.

The compromise settlement framework of 8 June 2023 sits on top of these recovery statutes. It requires every RE to put in place a board-approved policy covering compromise settlements and technical write-offs, laying down the process to be followed, the permissible sacrifice, and a graded delegation of authority. Crucially, a settlement proposal must be sanctioned by an authority at least one level higher than the authority that originally sanctioned the credit, so that the same officials do not both lend and later waive.

Because the framework fixes a floor of 12 months as the cooling period before an RE can take fresh exposure to the same borrower for exposures other than farm credit, an OTS is not a soft option that leaves a clean slate the next morning. The borrower who settles trades a discount today against a documented settlement record and at least a year before the same lender will consider a new loan.

Procedure Step by Step

The mechanics of a compromise settlement under the 8 June 2023 framework interlock with any SARFAESI action already running. Missing a statutory clock — the 60-day demand window, the 45-day DRT window — can forfeit rights that no settlement negotiation will restore. The sequence below follows a secured loan of Rs 20 lakh or more, the usual DRT threshold under the RDDB Act, 1993.

1. NPA classification (Day 0). The account is tagged non-performing after 90 days of overdue payments under RBI's IRAC norms. Only an NPA can be taken into the SARFAESI machinery.
2. Section 13(2) demand notice (60 days). The secured creditor issues a written demand under Section 13(2) of the SARFAESI Act, 2002, calling on the borrower to clear the full dues within 60 days. This notice is the trigger for both enforcement and any OTS conversation.
3. Section 13(3A) representation (within the 60 days). The borrower may object or make a representation. Under Section 13(3A) the secured creditor must consider it and, if not acceptable, communicate reasons within 15 days — the reasoned-reply right established in the Mardia Chemicals litigation. This is also the moment to table a written OTS proposal.
4. Board-approved OTS evaluation. The lender assesses the proposal against its board-approved policy: the realisable value of the secured asset, the likely recovery through a full SARFAESI foreclosure or DRT route, and the net present value of a cash settlement today versus a contested recovery over several years.
5. Sanction one level up. If the numbers work, the proposal is approved by an authority at least one level higher than the original sanctioning authority. For any account classified as wilful defaulter or fraud, board approval is mandatory in every case under the 8 June 2023 framework.
6. Settlement agreement and payment. The borrower pays the agreed sum in cash, typically as a lump sum or in a short, defined instalment schedule. On full payment the lender waives the balance and closes the account, issuing a no-dues certificate.
7. Cooling period (minimum 12 months). For exposures other than farm credit, a floor of 12 months applies before the same RE can extend fresh credit to the borrower.

Borrower Defences Available

A compromise settlement is a negotiation, not a surrender of legal rights, and the strongest OTS positions are usually built by a borrower who has kept the statutory defences alive. The SARFAESI Act, 2002 preserves a graded set of remedies, each with its own deposit and timeline, and each capable of buying the time in which a workable settlement can be shaped.

The first defence is the Section 13(3A) representation. Following the Supreme Court's ruling in Mardia Chemicals Ltd v Union of India (2004), a secured creditor that rejects a borrower's objection must give reasons within 15 days; a bare, unreasoned rejection is itself a ground of challenge. Our note on what Mardia Chemicals won you sets out how far that reasoned-reply right reaches.

The primary adjudicatory defence is Section 17 of the SARFAESI Act, 2002 — an application to the Debt Recovery Tribunal within 45 days of the Section 13(4) measure, challenging the lender's enforcement. The DRT can examine whether the NPA classification was correct, whether the 60-day notice was validly served, and whether the amount demanded is accurate. Section 13(8) additionally preserves the borrower's right to redeem the secured asset by tendering all dues before the sale is completed.

If the DRT rules against the borrower, Section 18 provides an appeal to the Debts Recovery Appellate Tribunal within 30 days, but the borrower must deposit 50% of the debt claimed or determined, which the DRAT may reduce to not less than 25% for reasons recorded in writing. This 50% figure replaced the harsher 75% pre-deposit that the Supreme Court struck down in Mardia Chemicals in 2004, and it is a number every borrower should model before appealing.

Where the debt exceeds Rs 20 lakh and the lender has instead filed a recovery application under the RDDB Act, 1993, the borrower's defence shifts to the DRT's original jurisdiction, where set-off and counter-claims are permitted. For borrowers with multiple facilities, restructuring the exposure — for instance through a debt consolidation plan or a settlement funded by refinancing a loan against property — can turn a contested recovery into a fundable OTS. Borrowers who cannot afford counsel should note the free legal aid available under Section 12 of the Legal Services Authorities Act, 1987, explained in our NALSA eligibility guide.

Recent Tribunal/HC Position

The most important recent judicial statement on one-time settlements is the Supreme Court's decision in Bijnor Urban Cooperative Bank Ltd v Meenal Agarwal (2021), delivered by a bench of Justices M.R. Shah and B.V. Nagarathna. The Court held that no borrower can claim the benefit of a one-time settlement scheme as a matter of right, and that a writ of mandamus cannot be issued directing a bank to grant an OTS. Whether to settle, and on what terms, is the lender's commercial decision.

That principle is now reinforced by the structure of the 8 June 2023 framework, which routes every settlement through a board-approved policy and a sanction one level above the original lending authority. Read together, the Meenal Agarwal ruling of 2021 and the RBI circular of 8 June 2023 mean a borrower's leverage lies in the commercial case — the realisable value of the security versus the settlement sum — not in a legal demand that the lender must settle.

At the enforcement end, the reasoning of Mardia Chemicals Ltd v Union of India (2004) remains the anchor. By striking down the 75% pre-deposit and reading in the Section 13(3A) obligation to give reasons within 15 days, the Supreme Court fixed the balance that still governs SARFAESI: the creditor keeps a fast, court-free enforcement power, while the borrower keeps a meaningful, reasoned hearing and a DRT remedy under Section 17 within 45 days. A borrower who documents a credible OTS offer, keeps the Section 17 clock alive, and can show the security's realisable value negotiates from the strongest position the law allows.

FAQ

Can a wilful defaulter get a one-time settlement under the 2023 framework?

Yes. The RBI circular of 8 June 2023 expressly confirms that accounts classified as wilful defaulter or fraud remain eligible for a compromise settlement. However, such proposals require board approval in every case, and any settlement is without prejudice to criminal proceedings already under way against the borrower.

How long is the cooling period before I can borrow again after settling?

The 8 June 2023 framework sets a floor of 12 months as the cooling period before a Regulated Entity takes fresh exposure to a borrower who has settled, for exposures other than farm credit. A lender's board-approved policy may stipulate a period longer than 12 months, but not shorter.

Does signing an OTS stop an ongoing SARFAESI auction?

A compromise settlement is a negotiated cash settlement of the lender's claims under the 8 June 2023 framework. Until the settlement is sanctioned at the required authority level and the agreed sum is paid, the Section 13 enforcement process continues; a mere proposal does not by itself halt a scheduled sale. Borrowers should secure a written standstill as part of the settlement terms.

Can I demand a one-time settlement as a matter of right?

No. In Bijnor Urban Cooperative Bank Ltd v Meenal Agarwal (2021) the Supreme Court held that no borrower can claim an OTS as a matter of right, and that a court cannot direct a bank by mandamus to grant one. The decision to settle rests on the lender's commercial judgement under its board policy.

Is the amount the bank waives taxable in my hands?

For a business borrower, waiver of a trading liability is taxable under Section 41(1) of the Income Tax Act, 1961. The Supreme Court in CIT v Mahindra and Mahindra Ltd (2018) held that waiver of a term loan taken for a capital asset is not taxable under Section 28(iv) or Section 41(1). The treatment turns on the nature of the borrowing, so take professional advice on your specific facts.

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

Under the 8 June 2023 framework, a compromise settlement fully settles the lender's claims in cash with part of the dues waived, closing the account. A technical write-off removes the outstanding from the books at head-office level for balance-sheet purposes, while the lender's legal recovery rights against the borrower survive in full.

How much must I deposit to appeal a SARFAESI action to the DRAT?

Under Section 18 of the SARFAESI Act, 2002, an appeal to the Debts Recovery Appellate Tribunal requires a deposit of 50% of the debt claimed by the secured creditor or determined by the DRT, whichever is applicable. The DRAT may reduce this to not less than 25% for reasons recorded in writing, but it cannot waive it entirely.