When a borrower’s account becomes a Non-Performing Asset (NPA), the lender faces a strategic decision that will determine how much, and how quickly, it recovers. No two NPA situations are alike, the optimal resolution path depends on the value and quality of the security, the viability of the borrower’s business, the number of creditors, the borrower’s co-operation, and the amount of debt. This article provides a comparative analysis of the five primary resolution options available to Indian lenders.
The RBI’s Prudential Framework for Resolution of Stressed Assets (June 7, 2019 Circular), issued following the Supreme Court’s setting aside of the previous RBI Circular in Dharani Sugars and Chemicals Ltd v Union of India (2019), governs the process by which lenders must handle stressed accounts:
- Within 30 days of a “review period” (generally the first day of default), lenders must agree on a Resolution Plan in the case of large accounts (above INR 2,000 crore)
- If no Resolution Plan is implemented within 180 days of the end of the review period, the account must be referred to the IBC or other legal remedies
- Inter-Creditor Agreement (ICA) provisions require a majority of lenders (by value) to bind all lenders to an agreed resolution plan in consortium lending situations
For accounts below the IBA threshold, lenders have more discretion in choosing their resolution approach.
Option 1: One-Time Settlement (OTS)
An OTS is a negotiated agreement between the lender and borrower (and guarantors) to settle the outstanding debt at a discounted amount, in lieu of full recovery.
Process:
- Borrower submits an OTS proposal to the lender with proposed settlement amount and payment timeline
- Lender evaluates the proposal against the Board-approved OTS Policy (mandatory under RBI guidelines, each bank must have a transparent, Board-approved policy)
- Negotiations on the settlement amount (the “haircut”) and payment schedule
- Settlement agreement executed
- On payment of the settlement amount, all security is released, guarantees are discharged, and a no-dues certificate is issued
When OTS is appropriate:
- Borrower’s business is not viable as a going concern (no point in restructuring)
- Security value is significantly below the outstanding debt (lender recovers more by settling than by litigating)
- Borrower is co-operative and has access to funding from promoters, investors, or the sale of assets
- Single lender or consortium with aligned interests
Tax note: Under Section 41(1) of the Income Tax Act, 1961, the amount written off in an OTS (the difference between the outstanding loan and the settlement amount) is potentially taxable in the borrower’s hands as income from the cessation of a trading liability. Borrowers should factor this in.
Option 2: Restructuring Under RBI Framework
Restructuring modifies the terms of the loan, rather than settling it, to allow the borrower’s viable business to service the restructured debt. The RBI Prudential Framework (2019) governs this process.
Common restructuring measures:
- Extension of repayment period (tenure extension)
- Moratorium on principal repayment (interest continues to accrue)
- Reduction in interest rate (temporary or permanent)
- Conversion of interest accrued to a principal component (funded interest term loan, FITL)
- Conversion of a portion of debt to equity or Compulsorily Convertible Preference Shares (CCPS) of the borrower
Inter-Creditor Agreement (ICA): In consortium lending, the RBI Framework requires all lenders to sign an ICA within 30 days of the start of the review period. Under the ICA, a resolution plan approved by lenders holding at least 75% of the aggregate exposure (and 60% by number) is binding on all signatories.
When restructuring is appropriate:
- The borrower’s business is fundamentally viable but temporarily distressed
- The cash flow problem is a timing issue, not a structural insolvency
- Lenders are aligned on the resolution approach
- The restructuring meets the RBI’s Minimum Financial Parameters (MFPs), viability benchmarks that must be demonstrated post-restructuring
Option 3: SARFAESI Enforcement
SARFAESI allows lenders to take possession of and sell secured assets out of court. It is the fastest enforcement route for lenders with strong immoveable property security.
Comparative timeline: From the Section 13(2) notice to completion of auction sale: typically 6-18 months in practice (in theory, as little as 4-6 months, but delays in Section 14 CMM/DM proceedings and bidder interest are common).
Best suited when:
- The lender holds English mortgage over immoveable property with good title and clear encumbrance
- The property is realistically saleable (urban location, commercial property)
- The borrower is unco-operative
- The lender wants to act independently without coordinating with other creditors
Limitations:
- Does not cover unsecured debt
- Agricultural land is excluded
- Borrowers can challenge SARFAESI in DRT, creating delays
- Quality of public auction outcomes for distressed assets is often below market value
Option 4: DRT Proceedings
The DRT is the specialist tribunal for bank debt recovery under the RDBA 1993. Unlike SARFAESI, DRT proceedings cover both secured and unsecured debt. The Recovery Certificate can be executed against all the borrower’s assets, not just the security.
Comparative timeline: Filing to Recovery Certificate: 1-5 years in practice (DRTs vary significantly in their efficiency; high-volume benches like DRT-I Delhi or DRT Mumbai can take longer).
Best suited when:
- Significant unsecured exposure exists alongside the secured debt
- SARFAESI is unavailable (loan below INR 1 lakh, or security is not SARFAESI-eligible)
- Personal guarantors’ assets need to be pursued
- The lender needs court-supervised attachment and recovery
Option 5: IBC, Corporate Insolvency Resolution Process (CIRP)
Filing under Section 7 of the IBC (for financial creditors) initiates the Corporate Insolvency Resolution Process (CIRP) before the NCLT. This is the most powerful and most disruptive of all recovery options.
Key advantages over other routes:
- Management displacement: from the date of NCLT admission, the IRP takes over management of the corporate debtor; the borrower’s management loses control
- Moratorium: Section 14 moratorium prevents all other proceedings (SARFAESI, DRT, civil suits) against the corporate debtor, all recovery routes are channelled through CIRP
- Resolution plan: 66% of the Committee of Creditors (by value) can approve a resolution plan that writes off any portion of the debt, this allows genuine haircuts with legal finality
- Time-bound: statutory 180-day CIRP timeline (extendable to 330 days including judicial processes)
- Section 29A: promoters with NPA accounts cannot bid for their own company (established in Arcelormittal India Pvt Ltd v Satish Kumar Gupta (2018) 17 SCC 125)
Default threshold: The minimum default amount for IBC Section 7 filing is INR 1 crore (as amended in 2020).
When IBC is appropriate:
- The outstanding debt is above INR 1 crore
- The borrower’s business has enterprise value worth preserving (resolution plan is the goal)
- Multiple creditors exist and coordination is required
- Security alone is insufficient, CIRP allows recovery from the enterprise’s value, not just the collateral
- Personal guarantors can be separately proceeded against under the IBC personal guarantor framework (as upheld in Lalit Kumar Jain v Union of India (2021) 9 SCC 321)
Decision Matrix
| Factor | OTS | Restructuring | SARFAESI | DRT | IBC |
|---|---|---|---|---|---|
| Borrower co-operation needed? | Yes | Yes | No | No | No |
| Covers unsecured debt? | Yes | Yes | No | Yes | Yes |
| Speed | Fast (if borrower co-operates) | Medium | Medium-Fast | Slow | Medium |
| Management displacement? | No | No | No | No | Yes |
| Multiple creditors? | Complex | ICA required | Independent | Independent | CoC coordinates |
| Business preservation possible? | No | Yes | No | No | Yes |
Key Takeaways
- The RBI Prudential Framework for Resolution of Stressed Assets (2019) requires large-account lenders to agree on a resolution plan within specified timelines or refer the account to IBC, creating a structured decision-making obligation rather than leaving recovery entirely to individual lender discretion.
- IBC is the most powerful tool for large commercial NPAs because it displaces the borrower’s management, consolidates all creditor claims under the Committee of Creditors, allows debt write-downs with legal finality, and permits the sale of the business as a going concern through a resolution plan.
- The optimal NPA resolution path depends on the security quality, borrower viability, co-operation level, and creditor structure, a lender with strong immoveable property security and a co-operative borrower may achieve a better outcome through OTS than through a two-year SARFAESI enforcement and auction process.
This article is for informational purposes only and does not constitute legal advice. Readers should seek appropriate professional counsel for their specific circumstances.
META TITLE: NPA Resolution India: OTS, Restructuring, SARFAESI, DRT, IBC