Thank you for the hint sindy (also thanks to rextended for digging into), this is in fact what I was looking for. Quote from IP/Route docs:
If there are several routes that apply to a particular IP address, the most specific one (with largest netmask) is used. This operation (finding the most specific route that matches given address) is called routing table lookup.
Previously, I set the route with same netmask and thus the distance 0 of the default route was always preferred. So to say a case of RTFM 
So the solution for my (obviously confusing) question is to configure a more specific route to 192.168.197.1/32 on Router 2, instead of 192.168.197.0/24.
Router 1 can now be reached from Router 2 (WinBox Terminal) with 197.1, however, I cannot reach 197.1 from subnet 2 clients. I am lacking basic routing concepts 
Would appreciate if someone can point me to what I need to look into. Goal is to reach 197.1 target from 197.10 client. It is not possible to change the client configuration. Is this a problem of masquerading?
Thank you,
Daniel