Which banking policy affects loan settlement?

Summary

Loan Settlement is a process in which the bank and the borrower settle the outstanding loan in a smaller amount by mutual consent. This option comes up when the customer becomes financially weak and is not in a position to repay the entire loan. But it is also very important to understand that Loan Settlement is not just an agreement, but it is a process based on many banking policies.

First of all, RBI guidelines determine which loans will be considered NPA and under what circumstances the loan can be restructured or settled. After this, the bank’s own credit policy determines whether a settlement facility will be given to a particular customer or not. Along with this, policies like Loan Recovery Policy, One Time Settlement (OTS) Scheme, and Fair Practices Code also play an important role.

Apart from this, the credit bureau reporting policy determines what impact the customer’s credit report will have after the settlement. Often, the “Settled” status damages your CIBIL score, which may make it difficult to get a loan or credit card in the future. Similarly, if settlement is not possible, legal action is taken under laws like the SARFAESI Act or the IBC.

Introduction

In today’s era, taking a loan has become a common thing. People take loans from banks or financial institutions for studies, buying a house, starting a business, or for help in an emergency. But when, for some reason, we are unable to repay the loan on time, then comes the matter of Loan Settlement. This process starts when the borrower is unable to repay the full loan amount and settles with the bank or NBFC (Non-Banking Financial Company) with some concessions. 

This is why it becomes very important to know which banking policies affect this loan settlement. These policies decide whether the bank will accept your loan settlement request or not. Apart from this, these policies also determine what the effect will be on your credit history and CIBIL score after settlement.

Now the question arises that what things does the bank keep in mind while approving loan settlement? Actually, many factors work in this – like Reserve Bank of India (RBI) guidelines, bank’s own internal policy, customer’s ability to pay, loan amount, time of default, and customer’s credit report. 

In today’s article, we will understand in detail which major banking policies affect loan settlement, what impact these policies have on customers, and how you can make a better decision with an understanding of these policies. Let us now move ahead and understand the nuances of these policies.

What is Loan Settlement?

It is a financial process in which the bank or financial institution allows the loan taker to settle the loan by paying a lesser amount instead of the entire outstanding loan amount. This facility is for those who are unable to repay their loans on time and are continuously defaulting.

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. Therefore, it should be adopted only as a last option.

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.

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.

How does a Loan Settlement affect your credit score?

The impact can be seen in the following ways:

• After a Loan Settlement, if you have a credit card or other credit line, your credit limit may be reduced as creditors feel that you may be a high-risk customer.

• If your credit score drops, it may be difficult for you to get a loan, credit card, or any other type of credit facility. This can also affect your financial stability, especially if you face a financial emergency in the future.

• When you settle for a Loan Settlement with your bank, you are not paying off the entire loan, but paying a certain amount that is less than the principal amount. This is seen negatively by the credit bureaus as it shows that you have been unable to repay your debt. As a result, your credit score may drop.

• After the Loan Settlement process, your credit report will be updated with the information that you have “settled” your loan. This entry remains in your credit history for 7 years and can be viewed negatively by lenders or other creditors, which can affect your chances of getting a loan in the future.

• Since a Loan Settlement means that you have not repaid the entire loan, when you try to get a new loan in the future, banks may look at your credit score and report and reject your application, or give you a loan at higher interest rates.

How to choose the service of Loan Settlement?

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.

Understand the settlement process.

Carefully understand the settlement process offered by the service provider. Do they understand your entire situation and provide you with a better solution to negotiate with the bank? A good provider will give you complete information about the paperwork and the process so that you understand the entire process properly.

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 are the advantages and disadvantages of Loan Settlements?

It has the following advantages and disadvantages:

Advantages

• 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.

• 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.

Disadvantages

• 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.

• 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.

What is the legal process of loan settlement?

However, it is a legal process, and it is necessary to follow certain rules to do it.

1. Bank’s action in case of default

If you are unable to pay the loan EMI for 3 to 6 months continuously, the bank can declare it as NPA (Non-Performing Asset). After this, the bank can start the recovery process against you.

2. Request a loan settlement from the bank

If you are financially weak and are unable to repay the entire outstanding amount, then you can request a One Time Settlement (OTS) or Negotiated Settlement.

3. A Settlement Offer is given by the bank

After examining your situation, the bank gives a Settlement Offer, which decides the total amount you have to pay.

4. Sign the Settlement Agreement

If you accept the offer given by the bank, you will have to sign a written agreement. It will be mentioned in it that after the settlement, the bank will not take any further legal action against you. Note that this is a very important legal document, so read it carefully and consult your lawyer.

5. Pay the Settlement Amount

After signing the agreement, you have to pay the Settlement Amount within the stipulated time frame. The payment is usually made in a lump sum.

6. Get a No Dues Certificate (NOC)

Once you pay the settlement amount, the bank has to issue you a No Dues Certificate (NOC) to certify that your loan is now fully settled. Without an NOC, the loan settlement is considered incomplete, so it is very important to get it.

What are the things to keep in mind while settling a loan?

• Negotiate with the bank and find a fair solution.

• Get the loan settlement process in writing so that you do not face any problems in the future.

• Do not forget to update the CIBIL report after the settlement.

• Take the help of a financial advisor or lawyer if needed.

Which banking policy affects loan settlement?

Let us understand in detail which banking policies affect loan settlement.

RBI’s Prudential Norms and Loan Restructuring Guidelines

The Reserve Bank of India (RBI) issues Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRACP) from time to time. Under this:

• When an account becomes an NPA (Non-Performing Asset) (ie, EMI is not paid for 90 days), then the bank has to take action by considering it as default.

• RBI has also issued guidelines for loan restructuring and one-time settlement (OTS), which every bank is required to follow.

• This determines under which circumstances settlement is possible and in which cases the legal process of recovering the loan should be started.

Bank’s Internal Credit Policy

Each bank has its credit policy, which states:

• What documents will the customer have to submit for settlement?

• What will be the settlement amount, and how much discount can be given on it?

• How will the customer’s income, employment status, and payment history be assessed?

• Based on this, the bank decides whether the case is genuine or a deliberate default.

Loan Recovery Policy

Each bank has a Loan Recovery Policy, which states how the amount will be recovered from the loan defaulter:

• Will phone calls and notices be sent first?

• When will recovery agents be sent?

• Will a loan settlement be offered?

• This policy determines when and how the settlement process will begin after default.

One Time Settlement (OTS) Scheme

The OTS scheme is run by banks from time to time. This is a policy step, in which:

• A limited period of relaxation is given to close the bad loan accounts.

• This scheme is for NPA accounts.

• Its objective is to improve the balance sheet of banks and recover the outstanding loans.

Fair Practices Code by RBI

RBI has implemented the Fair Practices Code for all banks, according to which:

• The settlement process should be transparent.

• The customer should be given complete information.

• Forcible recovery is not possible.

Credit Bureau Reporting Policy

After loan settlement, the bank reports the customer’s information to CIBIL or other credit bureaus:

• If the loan is shown as “Settled”, it affects the customer’s credit score.

• This policy determines how many years the settlement information will remain in the credit report.

SARFAESI Act and Insolvency Code

• If the customer is a big defaulter, the bank can initiate legal action under the SARFAESI Act, 2002, or the IBC (Insolvency & Bankruptcy Code, 2016).

• Loan settlement is usually proposed before this.

• But if settlement does not happen, then the path of property attachment and auction is adopted.

Conclusion

Finally, you need to understand that Loan Settlement is not just a mutual agreement, but it is a process completely based on different banking policies and rules. When a borrower is unable to repay his loan, the bank provides a settlement facility to give him relief, but this relief is not unconditional. Many factors, such as the bank’s internal credit policy, rules set by the RBI, debt recovery strategies, customers’ ability to pay, and credit history, work behind this.

Apart from this, it is also important to know that Loan Settlement can give you temporary relief, but its long-term consequences can hurt your credit score and future loan eligibility. For instance, upon settlement, a status such as “Settled” or “Written Off” is appended to the CIBIL report, which could bring about trouble in availing any sort of loan or obtaining a credit card in the future.

Conversely, if your situation is true, like illness, loss of job, or any serious financial emergency, then the bank might be ready to provide some relief by sympathizing with your condition. For this, you must approach the bank in time, provide all the documents sincerely, and demonstrate that you want to repay the loan but are not in a position to do so due to the circumstances.

Frequently Asked Questions (FAQ’s)