RBI Guidelines on Loan Settlement: What Banks Are Required to Offer

Settlement is not something a borrower chooses out of preference. Banks and financial companies only consider it when you are in a genuine financial difficulty and repaying the full amount is no longer realistic.

. It is a last resort, not a shortcut.

So what does RBI actually do here? RBI does not negotiate individual settlements for borrowers. What RBI does is set the rules every bank and NBFC must follow when a borrower reaches that point.

The main governing document is the RBI Comprehensive Regulatory Framework for Compromise Settlements and Technical Write-offs, issued on June 8, 2023. This circular made several rules mandatory for all regulated entities, meaning every scheduled commercial bank, small finance bank, and NBFC registered with the RBI.

The most important rule from that circular: every bank must have a board-approved policy for settlement. This means the rules cannot change from branch to branch or officer to officer. The policy must be written down, approved at the highest level, and applied consistently.

This blog covers unsecured loans only: personal loans, credit cards, BNPL (buy now, pay later), and loan apps. It does not cover home loans, car loans, or gold loans. Those are secured loans with separate rules.

One data point worth knowing: the gross NPA (loan marked as bad by the bank) ratio of scheduled commercial banks came down to 3.9% as of March 2023, per the RBI Financial Stability Report. Banks are actively managing recovery, and a written policy framework is part of how they do it.

Most settlement conversations start after a loan is formally classified as an NPA, a loan marked as bad by the bank. This classification typically happens after 90 days of missed EMI payments.

But 90 days is not the only entry point. If you reach out to the bank in writing before your loan crosses 90 days, and you can show genuine financial difficulty, some banks will begin informal discussions earlier. Proactive communication, per RBI's Fair Practices Code guidance, gives you more options, not fewer.

Once a loan is in NPA status, it moves through classification stages. In plain terms:

• Sub-standard: NPA for up to 12 months. Some chance of recovery still expected.

• Doubtful: NPA beyond 12 months. Recovery becomes more uncertain.

• Loss asset: Recovery is considered very unlikely. Often written off by the bank.

Formal settlement negotiations typically start after around 6 months of default. By that point, the loan is clearly in the sub-standard or doubtful category, and the bank knows it needs a resolution.

None of this means the borrower chose to default. The most common story is a salaried person whose income dropped, a job change that took longer than expected, a health expense that wiped out savings, or a family situation that didn't leave room for EMIs. The classification is a bank accounting term. It does not reflect character.

The earlier you communicate your difficulty in writing, the more options remain open.

This is the section most people, and most competitors miss entirely.

Under RBI's Prudential Framework for Resolution of Stressed Assets, banks are required to examine all available resolution options before considering settlement. Settlement is the last option the bank should offer, not the first.

What does that mean for you? It means you have the right to ask for alternatives first. Here are the options banks must consider:

EMI Reduction: The bank lowers the monthly EMI amount, making it more manageable within your current income.

Tenure Extension (more months to repay): The bank stretches the repayment time, which brings the monthly amount down. The total interest paid may increase, but the immediate pressure reduces.

Moratorium (short payment break): A temporary pause on EMI payments, typically for up to 6 months. Interest may continue to accumulate, but you get breathing room.

Restructuring (changing the loan plan to a new schedule): The bank reworks the entire repayment structure- new EMI, new timeline, sometimes a fresh agreement to match what you can genuinely repay.

OTS (one-time settlement, paying it once and the matter ends): This comes last. It involves paying less than the total outstanding amount, where the lender agrees to accept a reduced amount to settle the outstanding debt.

. It damages your CIBIL and should only be reached after the other options above have genuinely failed.

The RBI circular is clear: settlement shall be considered only after all other options have been examined and settlement is the best available outcome.

If a bank or recovery agent is pushing you toward settlement without first offering you these alternatives, that is not how the process is supposed to work.

Settlement is not a casual conversation. It is a structured process with specific steps. Here is the general method, something you can follow independently.

1. Write Down What You Owe

Make a clear list: the original amount you borrowed, the interest added so far, and any late fees charged. Keep this as your reference point for every conversation with the bank.

2. Write to the Bank in Writing

Send a formal letter or email to the bank's grievance or customer care department. State clearly that you are facing genuine financial difficulty and are unable to repay the full amount. Keep a copy. Written communication creates a paper trail that protects you later.

3. Ask for Resolution Options First

Under RBI rules, banks must explore alternatives before settlement. Ask specifically about a change in the loan plan (restructuring), a change in repayment time (tenure extension), or a short payment break (moratorium). These options protect your CIBIL better than settlement.

4. Negotiate the Settlement Amount

If no alternative works, ask for OTS (one-time settlement, paying it once and the matter ends). The bank will assess your financial position and make an offer. RBI requires the bank's settlement approval to go to a level above the person who originally gave you the loan; no self-approval.

5. Get the Agreement in Writing Before Paying

Do not pay anything without a signed settlement letter from the bank. That letter must clearly state: the settlement amount, the date, and that no further claims will be made after payment.

6. Pay and Collect Your NOC

Pay as agreed. Immediately follow up for your NOC (clearance letter from the bank). Keep your NOC safely, as it is an important record of the settlement.

7. Check Your CIBIL Report in 30 to 45 Days

Verify that the bank has updated your report to "Settled", not "Default" or "Written-off." If there is a mismatch, raise a dispute with CIBIL and send a written reminder to the bank. FREED's counsellors can help follow up on both if you need support at this stage.

One important rule from RBI: if payment is spread over more than 3 months, it is treated as restructuring rather than settlement. Keep this in mind when agreeing on payment terms.

RBI does not just set rules for banks; it sets rights for borrowers. Knowing these makes the settlement process less frightening and more manageable.

Right to Transparency: The bank must give you a full written breakdown of the settlement amount versus the total outstanding amount. You are entitled to understand exactly how the settlement amount compares to the total outstanding amount.

and what you are paying.

Right to a NOC: After you pay the agreed settlement amount, the bank must issue a clearance letter (called NOC). This is your proof that the matter is resolved. Under the RBI's Fair Practices Code, borrowers are entitled to this in writing.

Right to CIBIL Updation: After settlement, the bank is required to update your CIBIL record correctly to "Settled," not left as "Default" or "Written-off." If the bank fails to do this, you can raise a formal dispute with CIBIL.

Right to Complain to the Banking Ombudsman: If a bank refuses a reasonable settlement proposal, delays your NOC, or handles your case unfairly, you can escalate to the RBI Banking Ombudsman at no cost. The Ombudsman can award up to ₹20 lakhs payable to borrowers in proven cases.

Right to Know Who Is Contacting You: Recovery agents must carry valid identification and operate within the RBI's Code of Conduct. They cannot call before 8 AM or after 7 PM. They cannot use abusive language. They cannot contact your family members or employer without your permission.

RBI has mechanisms in place to address complaints where lenders do not follow applicable guidelines.

from the RBI up to ₹1 crore and above under Section 47A of the Banking Regulation Act. The rules have teeth.

This section will be honest with you. Settlement is not painless on your credit report.

After you settle a loan, the bank marks the account as "Settled" on your CIBIL report. This is different from "Closed." A loan that is fully repaid is marked "Closed, " a clean record. A settled loan carries a "Settled" mark, which tells future banks that the full amount was not repaid.

A "Settled" status may remain visible on your credit report for an extended period.

. During that period, some lenders may take a "Settled" status into account when reviewing future applications.

because the "Settled" status raises a flag.

But here is the honest comparison: a "Settled" mark is still better than an ongoing "Default" or a "Written-off" status sitting permanently on your report. Settlement ends the active default. It gives your credit history a defined endpoint, something to recover from. A continuing default has no endpoint until it is resolved.

The most common mistake borrowers make after settlement: not checking whether the bank updated the CIBIL record correctly. Banks sometimes leave the status as "Default" or "Written-off" even after the settlement is complete, and the NOC is issued. This is an error, and it is one you need to catch. Check your CIBIL report 30 to 45 days after your settlement payment. If the status is wrong, raise a dispute with CIBIL immediately and send a written reminder to your bank's nodal officer.

Settlement is the beginning of your credit recovery, not the end of your credit access. Consistent repayment behaviour over time can help strengthen your credit profile, although outcomes vary from person to person.with consistent financial behaviour after settlement.

Many people have loans with NBFCs (non-bank loan companies) rather than traditional banks. Many others have loans with loan apps. And in some cases, your loan may have been sold to an ARC.

All of these are covered under the RBI's settlement framework.

An ARC (Asset Reconstruction Company) is a company that buys non-performing loans (NPA loans) from banks. When a bank sells your defaulted loan to an ARC, the ARC becomes the new party you need to negotiate with. But RBI rules still apply to the ARC because ARCs are also regulated entities.

In January 2025, the RBI updated the rules specifically for ARCs. The key points:

Every ARC must have a board-approved settlement policy, the same as banks.

For any settlement above ₹1 crore, an Independent Advisory Committee (IAC) must review the proposal before approval. This is a safeguard against conflicts of interest.

The settlement amount must generally not be less than the realisable value of any security the ARC holds.

If you have a loan with an NBFC, including a loan app that is RBI-registered, the same June 2023 framework applies. The NBFC must have a board-approved policy, explore alternatives before settlement, and follow the same transparency rules.

One important flag: if a loan app is not RBI-registered, these protections do not apply to you. That itself is a warning sign about the legitimacy of the platform. Check whether your loan app is listed as an RBI-regulated entity before engaging in any settlement discussion with them.

If you have decided that settlement is the right step given your situation, here is what genuinely helps.

Always communicate in writing. Every request, every follow-up, every confirmation email or letter. Verbal conversations leave no trail. Written ones do.

Keep copies of everything. Every bank statement, every letter you send, every reply you receive. Keep a folder, physical or digital. You will need it if there is a CIBIL dispute later.

Do not pay before you have the settlement agreement. This is the most important step in the process. A verbal offer from a recovery agent is not an agreement. Wait for the signed letter from the bank before any money moves.

Follow up for the NOC in writing. After payment, send a written request for your NOC (clearance letter from the bank). Do not assume the bank will send it automatically.

Check your CIBIL 30 to 45 days after payment. Confirm the status shows "Settled", not "Default" or "Written-off." If it is wrong, act immediately.

Do not take a new loan immediately after settlement. Your credit report needs time to stabilise. Some lenders may take a recent settlement into account when reviewing a new application.

, and the hard inquiry will add further strain to your score.

FREED's counsellors can help with the paperwork, ensure the settlement letter is worded correctly, and follow up with the bank on your NOC and CIBIL update so important documents and updates are easier to track. .

FREED is India's first debt relief company, founded in 2020 and headquartered in Gurugram. FREED helps borrowers facing genuine financial difficulty navigate loan settlement on unsecured loans, personal loans, credit cards, BNPL, and loan apps. FREED supports borrowers by helping them understand their options, organise documents, and navigate the settlement process. . Fees are charged only on successful settlement. FREED does not handle secured loans such as home loans or car loans.