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RBI Amends Rules On Gold, Silver Loans

Mumbai: The Reserve Bank of India (RBI) has revised its existing rules to make retail loans more flexible, widened the scope for lending against gold and silver collateral, and provide easier capital-raising avenues for banks besides improving credit information systems. Announced through seven directions and circulars on Monday evening, three of these changes will take effect from October 1, while four others have been released for public consultation until October 20, 2025. Draft proposals, meanwhile, would extend repayment terms, sharpen exposure limits and quicken credit reporting measures that collectively modernise bank lending. In a move to benefit borrowers while providing greater flexibility to lenders, the central bank has allowed banks to reduce the spread components (other than credit risk premium) for the benefit of the borrower earlier than three years. Currently, floating rate retail and MSME loans are linked to external benchmark. Banks charge a spread over the external benchmark linked lending rate (EBLR) based on the borrower's credit profile which can be changed only once in three years. The amendments have been made to the guidelines on Interest Rate on Advances 2025. Banks have also been allowed at their discretion to provide the option to borrowers to switch over to the fixed rate at the time of reset. Says Anil Gupta, Senior Vice President and Co-Group Head at ICRA, "Banks often attract customers from other banks by offering lower interest rates on new loans. However, existing regulatory framework may constrain the ability of banks to reduce lending rates for current borrowers. In this context, introducing greater flexibility to reset lending rates in favour of existing customers is a welcome move and could enhance borrower benefits." Commenting on the revised norms on fixed rate loans, Gupta said that the switch over to a fixed rate loan can adversely impact the profitability of banks, especially if such a reset happens at the bottom of the interest rate cycle. Hence allowing lenders the discretion to provide such options to borrowers based on their liability profile will offer them the flexibility to manage these transitions strategically, thereby safeguarding their profitability. The central bank has also widened the scope for lending against gold and silver collateral. At present, banks cannot finance purchases of primary gold or silver, though working capital loans are allowed for jewelers. Now, banks, including tier-3 and tier-4 urban co-operative banks, can provide working capital loans to any borrower using gold as a raw material, rather than limiting this facility to jewelers only. In addition, the central bank revised Basel III capital regulations by increasing the eligible limits for perpetual debt instruments (PDIs) issued in foreign currency or rupee bonds abroad. This move aims to give banks more flexibility to raise Tier-1 capital through offshore markets. With the increase in the foreign currency AT1 issuance threshold, some large public sector banks will now have the opportunity to tap overseas markets for these instruments. The last such issuance by a public sector bank occurred in 2016. Since then, interest rates on domestic AT1 bonds have remained relatively favourable compared to foreign currency bonds. However, with further rate cuts anticipated in developed economies, large banks may find greater flexibility to explore international funding avenues -- especially as domestic bond yields have begun to rise in the last quarter. Additionally, given the robust capital positions of banks, AT1 bond issuances have been minimal from private banks and relatively subdued from public sector banks. In FY2025, public sector banks raised Rs. 8,000 crore through AT1 bonds, down from Rs. 17,516 crore in FY2024. Notably, private banks have not issued any AT1 bonds in the past two fiscal years.

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