The Supreme Court in it's landmark judgment, The Bijnor Urban Cooperative Bank Limited, Bijnor & Others v. Meenal Agarwal & Others (AIR 2022 SC 7), delivered on December 15, 2021, the Supreme Court of India addressed the contentious issue of one-time settlements (OTS) in debt recovery. The Court clarified that borrowers do not have an inherent right to demand an OTS from financial institutions. Instead, the decision to grant such settlements lies entirely at the discretion of the lender, guided by its internal policies, Reserve Bank of India (RBI) regulations, and the specific circumstances of the case. This judgment emphasized that OTS is a privilege offered by lenders, not a guaranteed remedy for borrowers in financial distress.

One-time settlements are a mechanism where borrowers and lenders agree to resolve an outstanding debt through a lump-sum payment, often for less than the total owed. While such arrangements are beneficial in resolving disputes and avoiding litigation, the Court underscored that lenders have full autonomy to decide whether an OTS is feasible, ensuring that such decisions align with institutional objectives and financial prudence.

This judgment balances the relief sought by borrowers with the discretion required by lenders, reinforcing the need for transparency and fairness. By clearly defining the limitations of OTS as a remedy, the Court protected lenders from misuse while encouraging borrowers to approach the process with genuine intent and accountability.

Key Highlights of the Supreme Court's decision

1. No Right to demand OTS
   Borrowers cannot claim a one-time settlement (OTS) as a matter of right, as it is not an entitlement guaranteed under law but rather a discretionary mechanism offered by financial institutions. OTS is a tool designed to facilitate the resolution of debt disputes, allowing borrowers to settle their outstanding amounts through a lump-sum payment that is often less than the total amount owed. However, the decision to grant such a settlement lies solely with the lender and depends on the institution's internal policies, regulatory guidelines, and the specific circumstances surrounding the borrower's financial situation. Financial institutions are under no legal obligation to approve an OTS request unless it aligns with their operational objectives and risk management frameworks.
   
   Each case is assessed on its merits, and lenders evaluate factors such as the borrower's repayment history, the reasons for default, and their current financial capacity before making a decision. While OTS can be a mutually beneficial arrangement, lenders must ensure that offering settlements does not compromise their financial integrity or set a precedent for misuse. Borrowers seeking OTS must approach the process with a compelling case, demonstrating genuine financial hardship and a commitment to resolve the debt amicably. This discretionary nature of OTS ensures that it remains a strategic tool for debt recovery rather than an obligatory concession, balancing the interests of both borrowers and financial institutions.
    
2. Discretion of Financial Institutions
   The court emphasized that lenders retain full autonomy to decide whether to offer a one-time settlement (OTS), with the decision rooted in their assessment of the borrower's financial capacity and the specific circumstances surrounding the default. This autonomy allows financial institutions to evaluate each case individually, considering factors such as the borrower's repayment history, the reasons for default, and their current ability to make a lump-sum payment. The court highlighted that while OTS can be a practical tool for resolving debt disputes, its approval is not mandatory and must align with the lender's operational objectives, internal policies, and risk management strategies.
   
   Additionally, these decisions must adhere to the guidelines issued by the Reserve Bank of India (RBI), which set forth the regulatory framework for fair and transparent recovery practices. The RBI guidelines ensure that while lenders exercise discretion, they do so within a structured and ethical framework, avoiding arbitrariness or discriminatory practices. This approach balances the need for financial prudence with the borrower's potential for repayment, maintaining fairness in the system. By upholding the lender's discretion, the court reinforced the principle that OTS is not an entitlement for borrowers but a strategic recovery mechanism, granting lenders the flexibility to manage their resources while adhering to regulatory and institutional standards.
   
    
3. Policy Adherence
   Financial institutions must ensure that their decision-making process in granting or denying a one-time settlement (OTS) is transparent, fair, and consistent with their internal policies and regulatory guidelines. Decisions regarding OTS should be based on objective criteria, such as the borrower's financial circumstances, repayment history, and the reasons for default, rather than on arbitrary or subjective considerations. Institutions are required to maintain detailed records of the evaluation process, including the reasons for approving or rejecting an OTS request, to ensure accountability and provide clarity to borrowers.
   
   The principle of fairness necessitates that all borrowers in similar situations are treated equitably, and any form of discrimination or favoritism in offering settlements is strictly prohibited. Arbitrary practices, such as offering settlements to certain borrowers while denying them to others in comparable financial conditions, undermine the integrity of the process and can invite regulatory scrutiny or legal challenges. Institutions are also expected to communicate their decisions clearly and promptly to borrowers, providing valid reasons for denial if applicable, to avoid misunderstandings and foster trust. By adhering to these standards, financial institutions can balance their recovery objectives with borrower rights, ensuring that the OTS mechanism serves as a fair and effective tool for resolving debt disputes while maintaining the confidence of all stakeholders in the financial system.
    
4. Borrower Obligations
   Borrowers seeking a one-time settlement (OTS) must demonstrate a genuine inability to repay the full loan amount, supported by clear and credible evidence of their financial hardship. This process requires borrowers to present a compelling case to the lender, showing that their current financial circumstances make it impossible to meet the original repayment obligations. Such evidence may include documentation of reduced income, job loss, unexpected medical expenses, or other financial setbacks that have impacted their repayment capacity. Beyond proving financial difficulty, borrowers must also convey a willingness to resolve the debt amicably by cooperating with the lender and proposing realistic terms for the settlement.
   
   A proactive and transparent approach can significantly improve the borrower's chances of securing an OTS, as it reflects their commitment to honoring their obligations within their means. Borrowers must also be prepared to negotiate in good faith, ensuring that their proposed settlement amount aligns with their financial capability while being reasonable from the lender's perspective. Establishing this balance is essential, as lenders are more likely to accept settlement offers that demonstrate fairness and practicality. By showing both an inability to repay the full amount and a sincere effort to reach a mutually acceptable solution, borrowers can leverage the OTS mechanism to resolve their debts efficiently, avoid prolonged legal disputes, and rebuild their financial stability.

Implications for Borrowers

1. Limited Leverage
   Borrowers cannot compel lenders to offer a one-time settlement (OTS), as the decision to provide such an option lies solely with the financial institution. The discretion to grant or deny an OTS is a fundamental right of lenders, allowing them to assess each case based on their internal policies, regulatory guidelines, and the specific circumstances of the borrower's default. Lenders evaluate multiple factors before considering an OTS, such as the borrower's repayment history, financial capacity, and the potential benefits of recovering a partial amount through a settlement rather than pursuing prolonged legal or recovery processes.
   
   This discretionary authority ensures that lenders can align their decisions with business objectives and risk management strategies. While borrowers may seek an OTS as a way to resolve their debt burden, it is not an entitlement under the law, and lenders are not obligated to approve such requests. Borrowers must recognize that the financial institution's priority is to minimize losses and ensure equitable treatment across all accounts.
   
   Arbitrary compulsion or external pressure to provide an OTS undermines the lender's autonomy and the fairness of the process. For borrowers seeking a settlement, the best approach is to present a genuine case of financial hardship and negotiate in good faith, understanding that the ultimate decision rests entirely with the lender. This framework ensures that OTS remains a strategic recovery tool rather than an obligatory concession.
    
2. Negotiation is Key
   Borrowers seeking a one-time settlement (OTS) must approach lenders with a strong and well-prepared case, supported by substantial evidence of their financial hardship and a reasonable repayment proposal. Demonstrating financial difficulty is a critical component of the request, as lenders need to be convinced that the borrower's current circumstances genuinely prevent them from repaying the full loan amount under the original terms.
   
   Borrowers can strengthen their case by providing clear documentation, such as income statements showing reduced earnings, evidence of job loss, medical bills for unexpected expenses, or other relevant financial records that illustrate their inability to meet repayment obligations. Alongside evidence of hardship, borrowers must present a realistic and fair repayment proposal that aligns with their financial capacity while also being attractive to the lender.
   
   For example, offering a lump-sum amount that represents a significant portion of the outstanding debt can demonstrate the borrower's willingness to resolve the issue in good faith. The proposal should strike a balance, showing the lender that accepting the settlement is a practical alternative to pursuing legal or prolonged recovery actions. Additionally, borrowers should maintain an open and cooperative attitude during negotiations, expressing their commitment to honoring the settlement terms.
   
   This combination of credible evidence and a reasonable repayment proposal not only improves the chances of securing an OTS but also fosters trust and goodwill between the borrower and lender, paving the way for a mutually beneficial resolution.
    
3. Legal Challenges
   While borrowers have the right to challenge arbitrary denials of a one-time settlement (OTS) request, the burden of proof rests squarely on them to demonstrate that the lender's actions were unfair, discriminatory, or in violation of institutional policies. Borrowers must be prepared to provide evidence showing that the denial was not based on valid financial or operational considerations but instead stemmed from arbitrary or inconsistent practices.
   
   For example, if a borrower can prove that similar cases were granted an OTS under comparable circumstances, they may have grounds to challenge the denial as being inequitable or biased. Additionally, borrowers should carefully review the lender's internal policies and guidelines related to OTS and highlight any instances where the lender deviated from its stated procedures. Evidence of such deviations, coupled with the borrower's demonstrated effort to negotiate in good faith, can strengthen the case.
    

Borrowers may also need to gather documentation of their communications with the lender, including written correspondence, meeting records, or any proposals they submitted, to establish that they acted transparently and responsibly throughout the process. It is important for borrowers to recognize that merely being dissatisfied with the denial is insufficient; they must show tangible proof that the lender's actions were arbitrary or procedurally flawed. By presenting a well-supported argument, borrowers can appeal the decision through regulatory bodies like the Reserve Bank of India (RBI) or consumer courts, seeking a fair reassessment of their request. However, borrowers should approach such challenges judiciously, understanding that their case must be compelling enough to justify regulatory or judicial intervention. This process underscores the importance of fairness and accountability in the lender-borrower relationship, ensuring that decisions regarding OTS are both transparent and justifiable.

Implications for Financial Institutions

1. Greater Autonomy
   Lenders retain the discretion to grant or deny one-time settlement (OTS) requests, a prerogative that allows them to make decisions aligned with their business considerations, internal policies, and regulatory guidelines. This discretion ensures that lenders have the flexibility to evaluate each case on its unique merits, taking into account factors such as the borrower's repayment history, financial capacity, and the potential for recovering the outstanding debt.
   
   Financial institutions often use OTS as a strategic tool to manage non-performing assets (NPAs) efficiently, balancing the benefits of recovering a partial amount against the costs and risks of prolonged litigation or recovery processes. Regulatory guidelines, such as those issued by the Reserve Bank of India (RBI), provide a framework for ensuring that OTS decisions are fair, transparent, and consistent across similar cases.
   
   However, lenders are not obligated to approve every OTS request, as their primary responsibility is to safeguard their financial health and minimize losses. For example, if a borrower's repayment proposal is deemed inadequate or unrealistic, the lender may justifiably deny the request. Moreover, institutions must consider the broader implications of granting OTS, such as setting precedents that could encourage moral hazard or misuse by other borrowers.
   
   At the same time, lenders are expected to adhere to their internal policies and ensure that OTS decisions are made without bias, favoritism, or arbitrary practices. This balance of discretion and regulatory oversight enables lenders to use OTS as an effective recovery mechanism while maintaining accountability and professionalism. For borrowers, understanding this discretionary nature highlights the importance of presenting a compelling and fair case when seeking a settlement.
    
2. Need for Transperancy
   Decisions regarding one-time settlement (OTS) requests must be meticulously documented and consistent with the institutional policies of the lending organization to prevent any allegations of arbitrariness or favoritism. Proper documentation serves as a vital tool for demonstrating that the decision-making process was conducted transparently and in alignment with predefined policies and regulatory guidelines. For every OTS request, lenders should record the borrower's financial profile, repayment history, reasons for default, and the institution's rationale for granting or denying the settlement. This includes maintaining detailed records of all communications with the borrower, the evidence presented by the borrower to justify their request, and the evaluation criteria used by the lender.
   
   Consistency is equally critical to ensure fairness in the treatment of borrowers. For instance, borrowers in similar financial situations should receive similar considerations, and any deviations from standard practices must be clearly justified and documented. Without proper documentation and adherence to policies, lenders risk facing accusations of discrimination, bias, or favoritism, which can lead to reputational damage and regulatory scrutiny.
   
   Additionally, transparent and consistent documentation can serve as a defense for lenders if their decisions are challenged by borrowers through legal or regulatory channels. By ensuring that decisions are well-documented and policy-compliant, lenders not only uphold their credibility but also strengthen the integrity of the OTS process, fostering trust and fairness in their interactions with borrowers. This approach balances operational flexibility with accountability, creating a structured framework for debt resolution that aligns with both institutional objectives.
    
3. Focus on Recovery
   Financial institutions can strategically balance one-time settlement (OTS) offers with the dual goals of maximizing recovery and maintaining fairness in the debt resolution process. OTS serves as an effective tool for lenders to recover a portion of the outstanding debt while avoiding the costs, delays, and uncertainties associated with prolonged litigation or traditional recovery methods.
   
   By evaluating the borrower's financial capacity, repayment history, and the likelihood of recovering the full loan amount through other means, lenders can determine whether an OTS is a practical option. At the same time, fairness must remain a cornerstone of the decision-making process, ensuring that borrowers with genuine financial hardships are given an opportunity to resolve their debts amicably.

Lenders can achieve this balance by adhering to well-defined internal policies and regulatory guidelines, such as those prescribed by the Reserve Bank of India (RBI), which promote transparency, consistency, and ethical practices. For instance, offering settlements to borrowers in similar circumstances on equitable terms prevents allegations of bias or favoritism, fostering trust and accountability. Additionally, financial institutions can maximize recovery by tailoring OTS offers to incentivize borrowers to make lump-sum payments, thereby reducing the risk of further defaults while securing immediate cash flow.

To maintain fairness, lenders must also ensure that borrowers are fully informed about the terms and implications of the OTS, empowering them to make informed decisions. By combining a focus on recovery efficiency with a commitment to fairness, financial institutions can use OTS as a strategic mechanism to manage non-performing assets (NPAs) effectively while upholding their reputation and fostering positive relationships with borrowers. This balanced approach not only benefits lenders but also provides borrowers with a dignified and constructive path to financial resolution.

Why was this ruling Important?

The Supreme Court's ruling on one-time settlements (OTS) directly addressed the increasing concerns over borrowers misusing this mechanism as a way to evade their full repayment obligations. While OTS is designed to serve as a constructive tool for resolving debt disputes, the Court emphasized that it must not compromise the lender's fundamental right to recover debts in a manner that adheres to legal and institutional frameworks. Borrowers, in some cases, have viewed OTS as an entitlement rather than a discretionary option, attempting to leverage it to settle debts for significantly reduced amounts without adequately demonstrating financial hardship.

This misuse undermines the integrity of the OTS process and poses a risk to the financial health of lending institutions. The Court reinforced that OTS should remain a strategic mechanism for facilitating debt recovery under appropriate circumstances, rather than a blanket remedy available to all borrowers irrespective of their financial capability or intent.

The ruling also highlighted the importance of ensuring that OTS decisions align with institutional policies and regulatory guidelines, such as those issued by the Reserve Bank of India (RBI), which emphasize fairness, transparency, and consistency. By clarifying that lenders are not obligated to approve OTS requests and have the discretion to evaluate each case on its merits, the Court upheld the principle that OTS is a privilege granted at the lender's judgment, not a right.

This stance protects financial institutions from undue pressure to grant settlements while encouraging borrowers to approach OTS negotiations with sincerity and good faith. Ultimately, the judgment preserves the balance between supporting borrowers in genuine financial distress and safeguarding the interests of lenders, ensuring that OTS serves its intended purpose as a fair and effective debt resolution mechanism.

Conclusion
The Supreme Court's stance on one-time settlements (OTS) has provided crucial clarity on the rights and responsibilities of both borrowers and lenders, establishing a balanced framework for debt resolution. By upholding the discretionary nature of OTS, the Court reinforced that financial institutions have the autonomy to evaluate settlement requests based on merit, institutional policies, and regulatory guidelines.

This ensures that OTS remains a strategic tool rather than a borrower's entitlement, allowing lenders to align their decisions with risk management objectives and operational priorities. The judgment also emphasizes that OTS decisions must be transparent and consistent, safeguarding against arbitrariness or favoritism, while ensuring fairness and accountability in the recovery process.

For borrowers, the ruling highlights the importance of engaging in good faith negotiations, supported by clear evidence of financial hardship and reasonable settlement proposals. This dual emphasis on lender discretion and borrower accountability creates an environment conducive to amicable resolutions, reducing reliance on litigation or aggressive recovery methods.

Importantly, the OTS mechanism enables lenders not only to recover non-performing assets but also to address unsecured loans, which often pose a greater risk of loss due to the lack of collateral. By leveraging OTS effectively, lenders can secure partial recoveries on unsecured loans, ensuring liquidity and mitigating risks. The Supreme Court's judgment strengthens the integrity of the OTS framework, ensuring that it serves as a fair, transparent, and efficient tool for resolving debt disputes while balancing the interests of both borrowers and lenders.