How to settle a loan that has been declared NPA?

By Admin / 05 Sep, 2025

Summary

When a person or organization does not repay the installments of the loan taken from the bank on time, then that loan is declared as NPA (Non-Performing Asset). That is, a loan from which the bank is not getting any benefit. But this does not mean that there is no way to resolve it. With the right information and proper steps, NPA loans can also be settled.

First of all, when the loan becomes NPA, instead of getting scared, contact the bank. Tell the bank your current financial situation honestly and express that you want to settle. After this, the bank can offer you an OTS (One Time Settlement) scheme, in which some amount is waived, and the loan can be settled by paying the remaining amount.

Apart from this, after completing the settlement process, take the settlement letter and NOC, so that there is no legal or bank-related problem in the future. However, it is also true that loan settlement hurts the CIBIL score, but it is temporary. The score can be improved again with timely payments and responsible credit behavior.

Introduction

Taking a loan has become a common thing in today’s time. Whether it is for building a house, buying a car, or starting a business, banks and other financial institutions provide different types of loans to people. But when the loan installments (EMI) are not paid on time, the same loan can gradually become a serious problem. If the loan installment is not paid for more than three months, the bank declares the loan as an NPA (Non-Performing Asset). This situation not only damages your credit history but also almost eliminates the possibility of taking a loan or a credit card in the future.

Now the question arises that if someone’s loan has been declared NPA, will he remain stuck forever? Not! The good thing is that there are ways to get out of this situation. Although this path may be a bit difficult, with the right information and a little understanding, you can settle the NPA loan and bring your financial life back on track.

Apart from this, many people feel scared and ashamed about the NPA status, due to which they shy away from even talking to the bank. But the truth is that banks and financial institutions also provide options for loan settlement because they also want to get their money back, even if it is not complete. This is why there are many options like Loan Settlement, OTS (One-Time Settlement), and Repayment Plan through which loans declared as NPA can be settled.

In today’s article, we will tell you in simple and easy language what the ways to settle a loan declared as NPA are, what documents are required, and what things should be kept in mind. Also, we will understand what effect loan settlement has on your CIBIL score and future loan eligibility.

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.

What documents are required for a Loan Settlement?

The following documents are required:

Aadhar Card, PAN Card, Passport, or Driving License, etc.

Salary slips, income tax returns, bank statements, etc.

Loan Settlement letter, loan details, payment receipts, etc.

Investment documents, property documents, insurance policies, etc.

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.

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.

What is the difference between a Loan Settlement and a Credit Card Loan Settlement?

Although both Loan Settlement and Credit Card Loan Settlement aim to provide relief to the borrower, there are some important differences between them.

Points of Difference	Loan Settlement	Credit Card Loan Settlement
Type	Settlement of any type of loan (personal, home, car, education, etc.)	Settlement of Credit Card dues only
Settlement Process	The bank fixes a lump sum amount, on payment of which the loan gets settled.	The credit card company settles the amount at a fixed rate.
Impact on CIBIL score	CIBIL score may drop by 50-100 points, and it may become difficult to get a loan in the future	There is a huge impact on the CIBIL score, and it may be difficult to get a new credit card.
Possibility of getting a loan in the future	You may face problems in getting a home loan, a car loan, or any other loan.	Credit card companies may refuse to issue the card.

How much impact does a Loan Settlement have on your CIBIL score?

Loan Settlement has a direct and negative impact on your CIBIL score. When a person takes a loan from a bank or NBFC and is unable to repay the entire amount due to some reason, the bank gives him a chance to make a settlement, which is called a Loan Settlement.

However, there is a huge difference between a Loan Settlement and a Loan Closure. If you close your loan by repaying its full amount, it is recorded as “Closed” in your credit report, which improves your CIBIL score. But if you have some amount of the loan waived off under an agreement with the bank, it is reported as “Settled”, which can harm your credit score.

What are the effects of a Loan Settlement on your CIBIL score?

When a bank or NBFC reports to CIBIL that your loan is “settled”, your score drops immediately. The amount of drop depends on how good your score was earlier.

Banks and financial institutions put customers who have settled their loans in the “high-risk” category. This means that in the future, if you try to take any type of loan (personal, home, car, or education), your application may be rejected.

If you have settled a loan, it may be difficult to get a credit card from any bank in the future. Banks look at your credit history, and if they see a “settled” status, they may refuse to give you a credit card.

Even if a bank decides to give you a loan, you may get the loan at a very high interest rate. This is because banks consider you a risky customer and charge a higher interest rate to protect their money.

Loan settlement information remains in your CIBIL report for at least 7 years. This means that even if you improve your financial behavior later, your settlement record will continue to be visible to banks and may affect your creditworthiness.

What are the ways to improve your CIBIL score after a loan settlement?

If you have settled the loan and now want to improve your CIBIL score, then you can take the steps given below:

Pay all loan and credit card bills in full on time.

If possible, try to change the “Settled” status to “Closed” by contacting the bank.

Use credit cards limitedly and make full payments on time.

Take a small loan and repay it regularly to build a new good credit history.

Check the CIBIL report regularly and request that CIBIL rectify any mistakes.

How do you choose the loan settlement service?

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.

Customer support and communication

A good service provider will always stay in touch with the customer and resolve their problems properly. Make sure they answer your questions quickly and are ready to work with you in any difficult situation.

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

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.

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.

Disadvantages

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.

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.

How to settle a loan declared as NPA?

Below, we will know in detail how this can be done.

1. First, contact the bank

When the loan is declared as NPA, the borrower should first contact their bank or financial institution directly.

Instead of getting scared, talk.

Tell the bank about your financial situation.

Tell them that you want to repay the loan but cannot make the full payment in the current situation.

2. Ask for an OTS (One-Time Settlement) proposal

Banks often bring the OTS scheme for NPA accounts, in which

Some amount is waived,

The remaining amount has to be paid in a lump sum or installments.

3. Take the settlement deal in writing (Settlement Letter/NOC)

If the bank accepts your settlement proposal, then:

Take a written settlement letter from them.

After completing the payment, do not forget to take the NOC (No Objection Certificate).

This will serve as proof for you in the future.

4. Understand the impact on CIBIL score

The settlement of an NPA loan affects your CIBIL score.

Your score may fall for some time.

But by paying other bills/credit cards on time, you can improve the score again.

5. Avoid default again in the future

Do financial planning.

Take a loan only as per your need.

Pay installments on time.

Spend according to your budget.

Conclusion

Finally, it would not be wrong to say that being declared an NPA is a serious financial situation, but it is not the end of your life. Many people get nervous in such a situation or are afraid to talk to the bank, but the truth is that the banks themselves want to get their dues back, so they give such account holders a chance for settlement.

Apart from this, if you take the right steps in time, such as contacting the bank, telling about your financial situation correctly, and considering options like a one-time settlement, then you can get out of this situation. OTS (One Time Settlement) is one such option that brings relief to many people. Through this, you can get rid of the loan by paying your remaining amount in a fixed amount.

In this sequence, it is also important to note that after settlement, your CIBIL score is affected, but it is not permanent. If you manage all your financial transactions properly in the future, make payments on time, and use credit cards wisely, you can slowly improve your score again. So take the settlement as a new beginning, not the end.

Frequently Asked Questions (FAQ’s)

Que: What is NPA?

Ans: NPA means Non-Performing Asset, that is, a loan whose EMI or interest installments have not been paid for more than 90 days (3 months). Banks consider such loans as “bad loans” and declare them NPA.

Que: Can the loan be repaid even after being declared an NPA?

Ans: Yes, the loan can be repaid even after being declared an NPA. For this, you can contact the bank and make arrangements to pay through One Time Settlement (OTS) or in installments.

Que: What is the difference between loan settlement and loan repayment?

Ans: Loan repayment means paying the fixed amount of the entire loan and interest on time. Loan settlement means that the bank waives some amount and closes the account with the remaining amount.

Que: Does loan settlement affect the CIBIL score?

Ans: Yes, Loan Settlement is shown as “Settled” in the CIBIL report, which may affect your creditworthiness in the future. This may reduce the score.

Que: What is the OTS (One Time Settlement) scheme?

Ans: OTS is a scheme in which the bank gives the borrower a chance to get rid of the loan by paying a fixed amount in a lump sum (or in fixed installments). In this, some interest or principal can be waived.

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