The Reserve Bank of India (RBI) has introduced significant changes to its interest rate policies, allowing banks to reduce interest rates on floating rate loans more frequently. Previously, banks were restricted from modifying certain spread components for a period of three years. However, with the new amendments, effective as of Wednesday, banks will have greater flexibility to reduce non-credit-risk components of the loan spread before the three-year lock-in period.
This change is expected to benefit borrowers by passing on rate cuts faster. The RBI’s 2016 directions on interest rates for retail, personal, and micro, small, and medium enterprises (MSMEs) loans have been amended to allow for more frequent reductions in interest rates. Additionally, borrowers will have the option to switch to fixed-rate loans at the time of reset, a provision that was first introduced in 2023.
In addition to the interest rate changes, the RBI has also relaxed lending norms for jewellers. Banks will now be able to extend working capital loans against bullion to manufacturers using gold as raw material, including urban co-operative banks in tier-3 and tier-4 cities. This move is expected to expand access to credit for jewellers and increase liquidity in the sector.
The RBI has also eased capital-raising rules for banks. Perpetual debt instruments (PDIs) issued overseas in foreign or rupee-denominated bonds can now be included as part of a bank’s Additional Tier 1 (AT1) capital, up to 1.5% of risk-weighted assets. This is an increase from the previous limit of 49% of the eligible amount.
The central bank has also released four draft circulars for comment, which pertain to gold metal loans, the large exposures framework, intragroup exposures, and credit information reporting. These draft circulars will be open for comment until October 20. Overall, the RBI’s changes aim to provide greater flexibility to lenders while benefiting borrowers, and are expected to have a positive impact on the banking and financial sector.