Bank Loan Default | Court Mandates Consideration Of 'Aswas 2026' One Time Settlement Scheme Benefits Before Execution Sale: Kerala High Court

"The 6th respondent or other competent authority shall consider the request of the petitioners for settling the liability in terms of the One Time Settlement Scheme now in force (Aswas 2026), taking note of the provisions of Circular No.19 of 2026 and extending to the petitioners every possible benefits under the said circular." Kerala High Court, in a ruling dated September 28, 2026, held that a Co-operative bank must strictly consider a borrower's request for the benefits of an active One Time Settlement (OTS) scheme prior to proceeding with the execution of an award against mortgaged property.

 A single bench of Justice Gopinath P. directed the respondent bank to evaluate the petitioners' eligibility under the 'Aswas 2026' scheme, emphasizing that such benefits must be extended in accordance with the governing departmental circulars.

The petitioners had defaulted on credit facilities availed from the 6th respondent bank, leading the bank to obtain an award under Section 69 of the Kerala Co-operative Societies Act, 1969. Upon initiating execution proceedings before the Munsiff’s Court, the bank moved to sell the mortgaged property. The petitioners approached the High Court seeking the benefit of the 'Aswas 2026' OTS scheme, citing their expectation of receiving compensation from the Forest Department under the ‘Navakiranam Scheme’.

The core legal issue was whether the respondent bank was obligated to consider the petitioners' request for settlement under the 'Aswas 2026' scheme before continuing with the execution of the recovery award. The court also examined the applicability of Circular No. 19 of 2026 and whether the petitioners were entitled to claim benefits under older guidelines, specifically Circular No. 82 of 2013, regarding the capping of interest relative to the principal.

The court observed that while the respondent bank maintained that the petitioners' specific entitlement to certain interest-capping benefits under older circulars was debatable, the bank could not bypass the current OTS scheme. The court noted that Circular No. 19 of 2026 mandates that the bank must assess the borrower's current financial position and repayment capacity when adjudicating settlement requests.

Mandatory Compliance With Circular 19 of 2026

The bench emphasized that the bank is duty-bound to evaluate the application within the parameters of existing governmental circulars. By directing the parties to appear before the bank authorities, the court ensured that the administrative discretion vested in the co-operative institution is exercised fairly and in alignment with the humanitarian objectives of the 'Aswas' scheme.

Court Mandates Time-Bound Settlement Process

Recognizing the impending expiry of the OTS scheme on September 30, 2026, the court imposed a strict timeline for the bank's decision-making process. The court specifically directed that the bank must communicate the exact settlement amount to the petitioners by the following day to allow for the remittance of funds before the deadline.

The court disposed of the writ petition with specific directions, requiring the petitioners to appear before the 6th respondent bank at 11:00 AM on September 29, 2026. The bank is tasked with considering the request while extending all possible benefits under Circular No. 19 of 2026, ensuring that the final determination is communicated to the petitioners in time to facilitate payment by 5:00 PM on September 30, 2026.

Date of Decision: 28 September 2026