OTS at ₹2.05 crore or SARFAESI at ₹2.4 crore: the 15-month discounting question
The Nagpur branch of a public sector bank is deciding how to close a stressed account, Deccan Agro Foods Pvt Ltd. The outstanding is ₹3.20 crore - principal ₹2.60 crore plus interest ₹0.60 crore. The only collateral is an industrial plot with a distressed realisable value of ₹2.40 crore at auction. Legal opinion is that SARFAESI possession, valuation and sale will take about 15 months, with legal, valuation and security costs of ₹0.18 crore; there is also a real possibility that the promoter gets a stay in the DRT, stretching the timeline to 24 months. The bank discounts cash flows at 9% per annum.
The promoter has offered a one-time settlement of ₹2.05 crore as an upfront cash payment within 30 days, with the shortfall to be written off. He is not a wilful defaulter and no fraud is alleged against him. The branch's recovery officer prefers the SARFAESI route because ₹2.40 crore is "₹35 lakh more than the OTS". The branch's provisioning on the account is currently ₹1.10 crore.
1. Compare the two options on a present-value basis at the 15-month timeline and recommend one, quantifying the difference.
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Net SARFAESI cash at 15 months = 2.40 − 0.18 = ₹2.22 crore (before any cost of carry).
Present value = 2.22 / (1.09)^1.25.
- (1.09)^1.25 = 1.09 × (1.09)^0.25 ≈ 1.09 × 1.0218 ≈ 1.1137
- PV ≈ 2.22 / 1.1137 ≈ ₹1.99 crore
OTS today = ₹2.05 crore, PV = ₹2.05 crore.
Recommendation: accept the OTS. It is worth about ₹6 lakh more in present-value terms (2.05 − 1.99), and that is before counting the branch's own monitoring and legal effort. The officer's comparison of ₹2.40 crore with ₹2.05 crore is a nominal comparison: it ignores 15 months of delay and ₹18 lakh of costs. With an OTS, the ₹1.10 crore provision is largely written back in the year of receipt, which also helps the branch's P&L and capital position today rather than next year.
2. The promoter's lawyer says the DRT stay could push recovery to 24 months. Recompute, and find the recovery period at which the two options become equally attractive.
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At 24 months: PV = 2.22 / (1.09)^2 = 2.22 / 1.1881 ≈ ₹1.868 crore. The OTS is now ahead by about ₹18.2 lakh - the delay costs roughly ₹12 lakh for every extra nine months.
Break-even: solve 2.22 / (1.09)^t = 2.05 → (1.09)^t = 1.0829 → t = ln(1.0829) / ln(1.09) = 0.0797 / 0.0862 ≈ 0.92 years ≈ 11 months.
So SARFAESI is better only if the plot is actually sold within about 11 months, net of costs. Given DRT litigation risk, auction failures and the usual re-notification cycle, that is optimistic. The correct decision rule is: if the estimated time-to-cash exceeds ~11 months, take the OTS; if the branch genuinely believes it can close inside 11 months, pursue SARFAESI. Note also that the ₹2.40 crore realisable value is itself an estimate - a 10% shortfall on auction (₹2.16 crore net of ₹0.18 crore costs = ₹1.98 crore) already pushes PV below the OTS even at 15 months.
3. Before the ₹2.05 crore settlement is put to the competent authority, what must the branch confirm about eligibility and process?
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(1) Board-approved OTS policy must exist and the settlement must sit inside its delegated limits - otherwise the sanction is void regardless of the NPV. (2) Exclusions checked: the account must not involve fraud, wilful default, or a borrower classified as a wilful defaulter; the promoter must not be a director of another defaulting company barred from bank finance. The facts here help, but it must be documented from the CRILC and internal fraud register, not assumed. (3) Minimum cash recovery and promoter contribution as per the bank's policy for the outstanding and the security held; a settlement at ₹2.05 crore against ₹3.20 crore dues and ₹2.40 crore security must be justified in writing against the policy benchmark. (4) Due diligence and independent valuation of the collateral, since the ₹2.40 crore figure drives the whole comparison. (5) Approval at the correct level - OTS authority typically sits above branch level and often needs committee approval where the haircut exceeds a threshold. (6) Written consent and a settlement agreement with a default clause restoring the full claim if the payment fails, plus reporting of the OTS to the RBI's central repository.