Introduction:
In a recent judgment delivered on September 2025, the Supreme Court of India decisively ruled that the benefit of a Bank’s One Time Settlement (OTS) scheme cannot be claimed as a matter of right by defaulting borrowers, particularly when mandatory preconditions such as the required upfront payment are not complied with. The case arose from a long-drawn dispute between the Assistant General Manager, State Bank of India and Tanya Energy Enterprises, represented through its managing partner, Shri Alluri Lakshmi Narasimha Varma. The dispute stemmed from default on loans secured against seven mortgaged properties, which eventually led to the account being classified as a Non-Performing Asset (NPA) and recovery proceedings initiated under the SARFAESI Act by SBI. During these proceedings, Tanya Energy attempted to seek relief under the OTS 2020 Scheme of the Bank but failed to comply with the mandatory requirement of depositing 5% of the outstanding dues as an upfront payment. Despite this lapse, the Andhra Pradesh High Court, through both a Single Judge and a Division Bench, directed SBI to reconsider the borrower’s application under OTS. Aggrieved, SBI approached the Supreme Court. The bench comprising Justices Dipankar Datta and AG Masih, in a judgment authored by Justice Datta, set aside the orders of the High Court and reaffirmed the principle that eligibility under an OTS scheme does not create a vested right in favor of a borrower.
Arguments of the Petitioner (State Bank of India):
The petitioners, represented by Additional Solicitor General N. Venkataraman along with counsel Sanjay Kapur and others, forcefully argued that the High Court’s direction to reconsider the borrower’s OTS proposal was contrary to the express terms of the OTS 2020 Scheme. They emphasized that the OTS was not a statutory entitlement but a voluntary contractual arrangement offered by the Bank with strict conditions. Clause 4(i) of the OTS 2020 Scheme categorically required that any application for availing OTS benefits must be accompanied by an upfront payment of 5% of the outstanding dues. The petitioners pointed out that Tanya Energy had not deposited even a single rupee toward the upfront requirement, thereby rendering its application incomplete and invalid from inception. They further contended that the High Court erred in interfering with the Bank’s decision, as the judiciary could not compel the Bank to process an incomplete or defective application under the guise of fairness or equity. Referring to past judgments, especially the Supreme Court’s ruling in Bijnor Urban Cooperative Bank Ltd. v. Meenal Agarwal, counsel argued that the benefit of OTS is not an absolute right of a borrower and that banks retain the discretion to accept or reject proposals based on compliance with the scheme’s terms. They further noted that SBI had already made multiple attempts to recover dues by auctioning mortgaged properties under SARFAESI, which were hampered due to ongoing litigation and borrower defaults. Permitting the High Court’s order to stand, counsel argued, would not only undermine the sanctity of contractual schemes but also create a dangerous precedent where defaulting borrowers could bypass explicit conditions by resorting to judicial intervention.
Arguments of the Respondent (Tanya Energy Enterprises):
On the other side, the respondent-borrower Tanya Energy, represented by Senior Advocate Dama Seshadri Naidu along with counsel Mullapudi Rambabu and others, argued that the High Court had rightly directed SBI to reconsider their proposal under the OTS 2020 Scheme. They contended that the borrower’s eligibility was not in dispute and that the essence of the OTS scheme was to provide relief to distressed borrowers by allowing them to regularize their accounts through negotiated settlement. The respondents emphasized that the Bank’s refusal was arbitrary, colored by past defaults, and ignored the larger objective of OTS schemes—to prevent unnecessary litigation and prolonged recovery battles. They further argued that the requirement of upfront payment was not absolute and should be interpreted flexibly, especially where the borrower had demonstrated bona fide intent to settle. According to the respondents, the rejection of their application was motivated not by technical non-compliance but by the Bank’s prejudiced reliance on past defaults and the pendency of cases before the Debt Recovery Tribunal. They urged that since the scheme was designed to encourage settlements, the Bank should not take a hyper-technical view that would defeat its very purpose. They also argued that borrowers, when already under financial distress, may not be able to mobilize upfront amounts immediately and hence a flexible interpretation should be adopted in consonance with the principles of equity and fair dealing.
Court’s Observations and Judgment:
After carefully considering the rival contentions, the Supreme Court categorically held that the High Court’s interference with the Bank’s decision was legally unsustainable. Justice Datta, writing for the bench, observed that while eligibility under an OTS scheme was a threshold requirement, mere eligibility did not vest a borrower with any legal right to demand settlement unless all stipulated conditions, including the mandatory upfront payment, were fulfilled. The Court highlighted that the OTS 2020 Scheme of SBI expressly required an upfront payment of 5% of the outstanding dues to accompany the application and that applications without such payment were incomplete and not liable to be processed at all. Since Tanya Energy had admittedly not deposited any amount, its application was legally defective and incapable of being considered. The Court remarked that “it is clear as a sunny day that an application for availing the OTS benefit would be processed only if such application were accompanied by an upfront payment of 5% of the outstanding dues. Indubitably, the respondent faltered in not adhering to the express terms of such scheme by not depositing 5% of the outstanding dues as upfront payment, thereby rendering its application disentitled to be processed even, far less deserving of a favorable consideration.”
The bench relied on the precedent set in Bijnor Urban Coop. Bank Ltd. v. Meenal Agarwal where it was held that the benefit of OTS cannot be claimed as an absolute right. The Supreme Court clarified that the discretion of the bank in accepting or rejecting an OTS proposal must be respected by the courts, as long as the rejection is based on valid and express conditions of the scheme. The judgment also briefly touched upon the principle that reasons not expressly stated in an order could sometimes be considered in limited circumstances, but that was not relevant in the present case where the non-compliance was glaring and fundamental.
Consequently, the Supreme Court set aside the Andhra Pradesh High Court’s orders and allowed SBI’s appeal. However, the Court, while upholding the Bank’s authority, also extended a degree of equitable relief to Tanya Energy by granting it the liberty to submit a fresh proposal for settlement outside the OTS 2020 Scheme. The Court noted that if the respondent puts forth reasonable and workable terms, the Bank may consider such a proposal on its merits, though not under the previously applicable OTS framework. Additionally, the Court allowed SBI to proceed with recovery measures under the SARFAESI Act in accordance with law, thereby ensuring that the Bank’s right to recover public funds was not hampered by repeated litigation.
This ruling reaffirms the principle that contractual schemes like OTS cannot be stretched beyond their terms under the guise of judicial sympathy. Borrowers must strictly comply with the preconditions, and courts cannot compel banks to dilute their contractual requirements. At the same time, the Court’s gesture in allowing a fresh proposal indicates its awareness of the need for balance between enforcement of financial discipline and providing room for negotiated settlements in genuine cases.