The Supreme Court has ruled that a bank’s one-time settlement (OTS) scheme cannot be invoked as a matter of right and that borrowers must strictly comply with its mandatory conditions, including upfront payment of a specified portion of dues, to avail themselves of the benefits of the scheme.

A Bench of Justices Dipankar Datta and A G Masih set aside an Andhra Pradesh High Court order that had directed the State Bank of India (SBI) to reconsider a borrower’s OTS application despite the latter’s failure to make the required advance deposit.

 “Crossing the hurdle of eligibility per se would not entitle a defaulting borrower to claim consideration of his application unless the application itself satisfies the other stipulated conditions,” the top court observed, clarifying that eligibility alone does not confer a vested right.

Writing for the Bench, Justice Datta noted: “It is clear as a sunny day that an application for availing OTS would be processed only if it was accompanied by an upfront payment of 5 per cent of the outstanding dues. The respondent failed to deposit even a single paisa, rendering the application incomplete and undeserving of consideration.”

The apex court reiterated that the OTS mechanism is a concession, not an enforceable right.

The Bench said SBI was justified in rejecting the proposal since the very precondition for processing, which is deposit of 5 per cent of the outstanding dues, had not been met.

The dispute arose after Tanya Energy, the borrower, defaulted on loans secured against seven mortgaged properties.

Following the account’s classification as a non-performing asset (NPA), SBI initiated recovery under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and attempted auctions of the mortgaged assets.

Parallelly, the borrower applied under SBI’s OTS scheme of 2020. However, the application was rejected by the bank on grounds of non-compliance, past defaults, suppression of facts, and pending proceedings before the debt recovery tribunal (DRT).

Despite this, a single judge, and later a Division Bench of the High Court, ordered SBI to reconsider the borrower’s proposal. SBI challenged these directions before the Supreme Court.

Allowing SBI’s appeal, the apex court held that the bank was free to proceed with recovery measures under the law. At the same time, it left open a limited window for the borrower to make a fresh settlement proposal outside the 2020 scheme.

If the terms offered were found to be reasonable and workable, SBI could consider such a proposal, the top court said.

Experts say the larger impact of the judgment is that banks now hold a much stronger negotiating position.

"Borrowers, on the other hand, will need to be fully prepared both financially and technically before approaching an OTS scheme. Courts are now unlikely to intervene based solely on equity or financial hardship arguments," said Ashutosh Srivastava, partner at SKV Law Offices.

He also said that many borrowers turn to OTS precisely because they don’t have immediate liquidity, but after this ruling, unless they can deposit the required 5 per cent upfront amount, their application won’t be considered.

"This especially hurts those who may be able to arrange the money in stages but cannot pull together the full upfront amount right away," Srivastava said.

Suvigya Awasthy, partner at PSL Advocates & Solicitors, said that the judgment, while aimed at ensuring overall compliance with scheme requirements, may inadvertently create a loophole that lenders could exploit.

"It opens a window for lenders to reject applications on flimsy or even abysmal grounds, without genuinely applying their mind at the time of rejection," Awasthy said.