Banks offer One Time Settlements popularly known as OTS to the borrowers and such Settlement Offers basically convey the message to other lenders that the borrower is incapable of paying the loan in full. The Credit Bureaus will report the Loan Account status as “Settled” or Post (Written Off) Settled in the Credit Reports against the Loan Account in which settlement has been reached. The Banks, in such cases, will not issue any “No Dues” letter as the Bank will keep on maintaining the account with the residual “Waiver Amount”. However, the Banks release the securities like Vehicles, Homes or other moveable and immovable assets charged to the Bank and issue NOC against such assigned or pledged securities. If such a borrower, who has entered into OTS with the Bank, at a late stage approach any Bank for further loans – it is very likely that his Loan Application will get rejected due to the “Settled” status appearing in the CIBIL Report. CIBIL Consultants advise their clients to enter into a settlement with Banks as a last resort. For small waivers – the penalty for getting the CIBIL Scores damaged – is much BIGGER than the waiver amount. Banks keep a record of the waived amount of Principal, Interest, and Charges in a separate “Memoranda Recorded Interest and Charges along with Principal amount waived if any.
Sometimes Banks inflate the outstanding balances so as to pressurize the borrowers to come to the negotiating table. Banks offer settlements in such cases which appear to be lucrative to the borrowers but in real terms the waivers are insignificant. The borrower must check their “Statement of Loan and Cash Credit Accounts” critically regarding the application of the rate of interest and charges as per RBI guidelines. When the Loans become Non-Performing and are classified as Sub Standard, Doubtful and Loss then generally the borrowers become lax in checking their accounts and Banks keep on debiting illogical interest, penal interest, charges, legal fees, inspection charges thereby inflating the outstanding through compounding factor.
Before initiating talks for Settlements with Banks, the borrowers should convince their Bankers to refund the undue interest, penal interest, charges, legal fees, inspection charges etc to arrive at the minimum liability of the borrower. It is quite possible that the borrower my forgo the idea of Debt Settlement in case the Banks refund the above amounts. The Borrowers must see that the refund entries are passed on to their accounts as Refund through reversal mechanism and not as a waiver because waivers can impair the Credit Scores.
If still in doubt Consult Ashok Goyal, Retd Chief Manager of PNB and Leading CIBIL Consultant in India and Tell Your CIBIL Problems to him in detail.