How is loan settlement done in Co-operative Banks?

Summary

Co-operative Banks work to provide cheap and easy banking services to people in rural and semi-urban areas. These banks lend money to farmers, small traders, and ordinary people; however, many borrowers are unable to repay the loans on time due to financial constraints. In such a situation, Loan Settlement comes out as an important option.

First of all, it is important to understand that Loan Settlement means closing the account by taking a lump sum amount, waiving the outstanding loan amount to some extent, with mutual consent between the bank and the customer.

After this, when the customer contacts the bank and clarifies his difficulty, the bank asks for documents, and then the case is examined by a committee. If the case is genuine, the bank offers One Time Settlement (OTS). The customer has to deposit the entire amount within the stipulated time, after which the bank provides a Settlement Letter and a No Dues Certificate.

Introduction

The banking system in India works at many levels, and the role of Co-operative Banks is considered very important at these levels. These banks are specially created to meet the financial needs of farmers, small traders, people of rural areas, and middle-class customers. People take different types of loans from these banks, like agricultural loans, housing loans, education loans, and personal loans etc.

But when a person is unable to repay the loan taken on time for any reason, then this situation is called a Loan Default. However, if the customer gives information about their current financial situation to the bank on time and cooperates, then cooperative banks also provide the option of loan settlement.

Now you must be wondering what Loan Settlement is? In simple terms, it is an agreement in which the bank waives a part of your outstanding loan or allows you to pay in a lump sum. Return, the bank considers the loan as “settled” an,d the further recovery process is stopped.

In this article, we will know in detail what is the entire process of loan settlement in Co-operative Banks, what documents are required, what things should be kept in mind, and what are its advantages and disadvantages.

What is Loan Settlement?

It is a financial process in which a bank or financial institution allows the loan taker to settle the loan by paying a lesser amount than the entire outstanding loan amount. This facility is for individuals who are unable to repay their loans on time and have a history of continuous default.

Under a settlement, the bank can agree on a lump sum amount, which closes the loan. However, it is important to note that settling the loan can affect your CIBIL score, making it difficult for you to get a loan in the future.

How does a Loan Settlement work?

When a person is unable to pay the EMI of his loan on time and the outstanding amount accumulates over a long period, the bank or financial institution offers the option of loan settlement. In this, the bank allows the customer to pay a discounted amount instead of the entire outstanding amount, thereby settling the loan matter.

The process of settlement comprises discussions between the bank and the customer, wherein the bank assures that the customer can’t pay the entire loan amount. Thereafter, the bank issues a single-payment offer, which is typically lower than the outstanding loan balance. On the payment of this settled amount by the customer, the bank marks the loan as “Settled”. Yet, this is not good for the CIBIL score since it is not treated as a “Complete Payment”.

Hence, loan settlement should be opted for as a matter of last resort, and if at all possible, loan repayment schemes, loan restructuring, or alternative financial solutions must be opted for so that the credit rating is not impacted.

What documents are required for a Loan Settlement?

The following documents are required:

• Aadhar Card, PAN Card, Passport, or Driving License, etc.

• Salary slips, income tax returns, bank statements, etc.

• Loan Settlement letter, loan details, payment receipts, etc.

• Investment documents, property documents, insurance policies, etc.

How do I apply for a Loan Settlement online?

If you want to apply it online, then follow the easy steps given below:

Visit the bank’s website or app.

• Open the official website or mobile app of your loan provider or bank.

• Sign up if you already have an account, then log in. Otherwise, create a new account.

Check the customer support section.

• Go to the ‘Customer Support’ or ‘Contact Us’ section on the website or app.
• Here, you can find the option related to “Loan Settlement“, such as:
• Filing a loan-related complaint.
• Request form for loan settlement.

Fill out the request form for the settlement.

• Select the “Loan Settlement Request” option.
• Fill in the required details, such as:
• Your name
• Loan account number
• Email ID and mobile number
• Reason (why you want to settle, such as financial problems or reduction in income).

Upload the required documents.

• Upload documents that show your current financial situation, such as:
• Income certificate or salary slip
• Bank statement
• Any other proof that explains your problem?
• Upload all the documents by scanning them in the correct format (PDF or JPEG).

Submit and wait for the bank’s response.

• Once you have submitted the form, the bank will verify your request.

• The bank will most likely contact you within 7-10 working days. They will notify you of the settlement through email, call, or message.

Read the bank’s offer.

• The bank will make an offer to waive some portion of your pending amount. Carefully read it.

• If you accept the offer, go ahead. Otherwise, bargain further.

Make payment

• Pay the decided settlement amount from the bank in online payment mode.

• The bank will provide a payment confirmation and close your loan account.

What is the difference between a Loan Settlement and a Credit Card Loan Settlement?

Although both Loan Settlement and Credit Card Loan Settlement aim to provide relief to the borrower, there are some important differences between them.

Points of Difference	Loan Settlement	Credit Card Loan Settlement
Type	Settlement of any type of loan (personal, home, car, education, etc.)	Settlement of Credit Card dues only
Settlement Process	The bank fixes a lump sum amount, on payment of which the loan gets settled.	The credit card company settles the amount at a fixed rate.
Impact on CIBIL score	CIBIL score may drop by 50-100 points, and it may become difficult to get a loan in the future	There is a huge impact on the CIBIL score, and it may be difficult to get a new credit card.
Possibility of getting a loan in the future	You may face problems in getting a home loan, a car loan, or any other loan.	Credit card companies may refuse to issue the card.

How much impact does a Loan Settlement have on your CIBIL score?

Loan Settlement has a direct and negative impact on your CIBIL score. When a person takes a loan from a bank or NBFC and is unable to repay the entire amount due to some reason, the bank gives him a chance to make a settlement, which is called a Loan Settlement.

However, there is a huge difference between a Loan Settlement and a Loan Closure. If you close your loan by repaying its full amount, it is recorded as “Closed” in your credit report, which improves your CIBIL score. But if you have some amount of the loan waived off under an agreement with the bank, it is reported as “Settled”, which can harm your credit score.

What are the effects of a Loan Settlement on your CIBIL score?

• When a bank or NBFC reports to CIBIL that your loan is “settled”, your score drops immediately. The amount of drop depends on how good your score was earlier.

• Banks and financial institutions put customers who have settled their loans in the “high-risk” category. This means that in the future, if you try to take any type of loan (personal, home, car, or education), your application may be rejected.

• If you have settled a loan, it may be difficult to get a credit card from any bank in the future. Banks look at your credit history, and if they see a “settled” status, they may refuse to give you a credit card.

• Even if a bank decides to give you a loan, you may get the loan at a very high interest rate. This is because banks consider you a risky customer and charge a higher interest rate to protect their money.

• Loan settlement information remains in your CIBIL report for at least 7 years. This means that even if you improve your financial behavior later, your settlement record will continue to be visible to banks and may affect your creditworthiness.

What are the ways to improve your CIBIL score after a loan settlement?

If you have settled the loan and now want to improve your CIBIL score, then you can take the steps given below:

• Pay all loan and credit card bills in full on time.

• If possible, try to change the “Settled” status to “Closed” by contacting the bank.

• Use credit cards limitedly and make full payments on time.

• Take a small loan and repay it regularly to build a new good credit history.

• Check the CIBIL report regularly and request that CIBIL rectify any mistakes.

How do you choose the loan settlement service?

Here are some important points to consider that will help you choose the right Loan Settlement service:

Check the service provider’s credentials.

Before hiring a settlement service, make sure that the service provider you are hiring is registered and certified with financial institutions and banks. Only a reliable service provider can provide you with the right guidance and support. Checking online reviews and customer feedback is a good way to do so.

Check the service charges and other expenses.

Many service providers also charge a service fee, but make sure that the charges are not high and there are no hidden costs. Negotiate with the service provider beforehand about which services are free and which you will have to pay extra for.

Customer support and communication

A good service provider will always stay in touch with the customer and resolve their problems properly. Make sure they answer your questions quickly and are ready to work with you in any difficult situation.

Join our service

If you are also trapped in the debt trap and are facing a financial crisis, and want to adopt the path of Loan Settlement, then you can apply for our Loan Settlement service. We will help you settle your loan. Along with this, we provide you relief from the burden of the loan within 6 – 8 months. If you want to get more information about our service, then you can contact us.

How long does it take for a Loan Settlement to be processed?

The time taken for the settlement process also depends on various factors, such as the policies of your bank or lender, the outstanding amount, and the communication between the two of you. Usually, this process can take from 1 to 3 months.

The first action in the process of settlement is to approach the bank, where you tell your problem and payment status to the bank. Then, the bank proposes a settlement offer according to your situation. In case you agree with that proposal, you need to pay the amount to the bank within the agreed time. The bank indicates the loan as settled, and this would take some time.

The longer this entire process continues, the more it can impact your CIBIL score, so it is preferable to resolve the issue sooner.

What is the difference between Loan Settlement and Bankruptcy?

Let us understand the difference between them in simple language:

1. Definition

• Loan Settlement: It is a mutual agreement between a bank and a borrower. In this, the bank accepts that the borrower cannot repay the entire loan, so it takes a fixed amount and forgives the remaining amount.

• Bankruptcy: It is a legal process. When a person or organization is unable to repay its total liabilities, it applies for bankruptcy in the court, and the court decides how its assets will be distributed.

2. Process

• Loan Settlement: It is an illegal process that takes place directly between the bank and the customer. No court is involved in this.

• Bankruptcy: It is a judicial process in which the court and insolvency professionals are involved.

3. Debt Relief

• Loan Settlement: After paying some part of the loan, the rest of the loan can be waived off, but the CIBIL report has a tag of “Settled”.

• Bankruptcy: The court decides which loans will be waived off and which will not. This can get rid of the debt completely, but the property can be confiscated.

4. Effect on CIBIL score

• Loan Settlement: CIBIL score has a serious negative impact. The tag of “Settled” can become an obstacle in getting a loan in the future.

• Bankruptcy: CIBIL score falls completely, and it has a long-term impact.

5. Cost & Time

• Loan Settlement: This process is completed quickly, and there are no legal expenses.

• Bankruptcy: This can be a long and expensive process, which requires lawyers and professionals.

What are the advantages and disadvantages of Loan Settlements?

It has the following advantages and disadvantages:

Advantages 

• Loan Settlement improves the financial condition of the borrower.

• By doing a Loan Settlement, you can manage your income and costs better and avoid a financial crisis in the future.

• The heavy burden of debt often causes mental stress. With Loan Settlement, the borrower gets relief from this stress, and he can find mental peace in his life.

• Through Loan Settlement, the borrower gets a chance to get part of their debt waived off.

• This helps to improve his financial condition and gives him relief from a heavy financial burden.

• Although a Loan Settlement can affect the borrower’s credit score, by following the agreement on time and properly, he can gradually improve his credit score.

Disadvantages

• In the future, the borrower may have difficulty getting loans from these institutions.

• Through Loan Settlement, the entire loan of the borrower is not waived off. He still has to pay some amount, which can affect his financial condition.

• During a Loan Settlement, the agreement between the bank and the borrower has many conditions. The borrower is required to follow these conditions, which can limit their freedom.

• After a Loan Settlement, the borrower’s credit score may be affected.

• Loan Settlements may create difficulties in taking new loans or obtaining credit cards in the future.

• Due to a Loan Settlement, the borrower’s relationship with the bank and other financial institutions may deteriorate.

How to settle a loan declared as NPA?

Below, we will know in detail how this can be done.

1. First, contact the bank

• When the loan is declared as NPA, the borrower should first contact their bank or financial institution directly.

• Instead of getting scared, talk.

• Tell the bank about your financial situation.

• Tell them that you want to repay the loan but cannot make the full payment in the current situation.

2. Ask for an OTS (One-Time Settlement) proposal

• Banks often bring the OTS scheme for NPA accounts, in which

• Some amount is waived,

• The remaining amount has to be paid in a lump sum or installments.

3. Take the settlement deal in writing (Settlement Letter/NOC)

• If the bank accepts your settlement proposal, then:

• Take a written settlement letter from them.

• After completing the payment, do not forget to take the NOC (No Objection Certificate).

• This will serve as proof for you in the future.

4. Understand the impact on CIBIL score

• The settlement of an NPA loan affects your CIBIL score.

• Your score may fall for some time.

• But by paying other bills/credit cards/EMIs on time, you can improve the score again.

5. Avoid default again in the future

• Do financial planning.

• Take a loan only as per your need.

• Pay installments on time.

• Spend according to your budget.

How to Settle a Loan Without a Settlement Agency?

You can settle your loan yourself by following the easy steps and important tips given below –

1. Check your financial situation

First of all, check your current financial situation:

• What is your income?

• Which expenses are fixed?

• What is the maximum amount you can pay in a lump sum?

2. Contact the bank directly

• Before going to an agent for settlement, visit your bank or NBFC branch in person.

• Talk to the Loan Officer or the Collection Department.

• Tell them your situation clearly (such as job loss, illness, loss in business, etc.).

• Request for settlement.

3. Offer a lump sum (OTS)

• Settlement means that you request the bank to settle your loan by taking a fixed amount, reducing the interest or penalty.

• Offer the bank a One-Time Settlement (OTS).

• Banks are usually willing to offer discounts of 25% to 60% in OTS, especially when recovery seems difficult.

4. Submit all documents and evidence

Provide proof of how serious your situation is:

• Job loss letter

• Medical report

• Information related to business losses

• Bank statement, etc.

5. Get the Settlement Terms in writing

If the bank accepts your proposal, then:

• Get all the settlement terms in writing.

• Do not forget to get the Settlement Letter / No Dues Certificate from the bank.

• Make sure to get this document before making the payment.

6. Keep the proof safe after making the payment

• Keep all the payment receipts or bank transaction proofs safe.

• If there is any dispute in the future, these documents will protect you.

How is loan settlement done in Co-operative Banks?

The process of loan settlement in cooperative banks is as follows:

1. Initiative by Borrower

If you are unable to repay the loan, first contact the bank branch yourself. Delay can lead to legal action.

2. Application for Settlement

You have to submit a Loan Settlement Application, in which you explain your financial situation and the reasons for not being able to pay.

3. Submission of documents

Documents such as your income, expenses, current assets, and bank statements may be sought.

Required documents:

• Identity card (Aadhaar/PAN)
• Loan account statement
• Income certificate
• Statement of financial difficulties
• Bank statement

4. Bank investigation

The bank examines your application and documents. In many Co-operative Banks, a Settlement Committee is formed for this, which examines the seriousness of the matter and your intentions.

5. Settlement Offer

If the bank feels that the customer is genuine, it gives an OTS proposal. It contains the total amount, discount, and payment deadline.

6. Lump sum payment

You have to deposit the fixed amount in n lump sum. In some cases, the bank may also allow installments, but that happens in special cases.

7. No Dues Certificate / Settlement Letter

After the payment, the bank issues a Loan Settlement Letter and a No Dues Certificate. This is necessary to avoid any dispute in the future.

Conclusion

Finally, if we understand the whole topic in simple words, it is clear that Loan Settlement in Co-operative Banks can be a relief for those who are not able to repay their loan on time for some reason. When there is a financial crunch, the source of income stops, or it is not possible to repay the loan in an emergency, then this option can prove to be very useful.

However, it is very important to keep in mind that Loan Settlement should not be the first option. It should always be seen as a last resort, as it can spoil your CIBIL score and may cause trouble in taking a loan in the future. So whenever you are in financial trouble, first contact the bank, explain your situation, and try to find a timely solution.

Along with this, Co-operative Banks generally adopt a flexible attitude towards their customers as they work for social service. So, if you are a genuine borrower and start negotiations with the bank on time, then the chances of your loan settlement increase.

Frequently Asked Questions (FAQ’s)