How Do Banks Settle With NPA?

Banks in India have various options to settle with Non-Performing Assets (NPAs), aiming to recover dues while minimizing losses. Here are some common methods:

Compromise Settlement:

This involves negotiation with the borrower to reach a mutually agreeable amount, potentially lower than the outstanding dues.
It can involve a one-time payment or installments, with or without waiving a portion of the debt.
This option is often used for chronic NPAs, considering factors like borrower’s financial situation and recovery prospects.
The Reserve Bank of India (RBI) issues guidelines for such settlements, ensuring transparency and consistency across banks.

One-Time Settlement Scheme:

This is a special scheme offered by banks periodically, allowing borrowers a chance to settle their dues at a predetermined percentage of the outstanding amount.
This option can be beneficial for borrowers facing financial hardship and helps banks recover a portion of the dues quickly.
The RBI also lays out guidelines for such schemes, specifying eligibility criteria and minimum recovery percentages.

Other methods:

Securitization: Banks can sell off NPAs to specialized institutions, transferring the credit risk and recovering some capital.
Asset Reconstruction Companies (ARCs): These companies are dedicated to resolving bad loans by acquiring them from banks and attempting recovery through various methods.
Legal action: As a last resort, banks may resort to legal proceedings against borrowers to recover the dues, which can be a lengthy and expensive process.
The choice of settlement method depends on various factors, including the nature of the NPA, borrower’s financial situation, bank’s risk tolerance, and prevailing regulatory guidelines. Banks strive to find a balance between recovering dues and minimizing losses while adhering to ethical and legal considerations.

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