MUMBAI: The Reserve Bank has announced seven regulatory changes aimed at strengthening monetary policy transmission. These include allowing banks to reduce spreads on floating rate loans before the current three-year lock-in period—benefiting borrowers, easing gold loan norms for jewellery manufacturers and extending repayment timelines for retail customers. The measures also require lenders to submit weekly credit bureau reports and relax norms on large credit exposures.
The regulator in a late Monday night notification said three of the seven changes will take effect from October 1, while the remaining four are draft proposals for public to comments.
The regulator said of the seven amendments, the following three — interest rate on advances (amendment directions, lending against gold and silver collateral (first amendment) and the Basel III capital regulations (perpetual debt instruments in additional tier 1 capital) eligible limit for instruments denominated in foreign currency/rupee denominated bonds overseas) directions will come into effect from October 1.
The other four are draft proposals and include the gold metal loans directions; large exposures framework (amendment circular); guidelines on management of intragroup transactions and exposures (amendment circular), and the draft amendments to the credit information reporting directions, which will come into force after the public feedbacks are included.
The other key changes include faster weekly credit data submission by institutions by eliminating the current fortnightly reporting of credit data, and extension of repayment period of gold metal loans to 270 days from 180 now, and increased allowances for non-manufacturing jewellers to avail gold loans them. Under the revised directions on interest rate on advances, banks can now reduce their spread components on floating rate loans before the current three-year lock-in period, a move that will help borrowers by way of lower EMIs.
The regulator believed this will result in faster transmission of policy rate cuts, leading to lower EMIs or interest outgoes for borrowers. Borrowers will also have the option to switch to fixed-rate loans at the time of rate resets, though this will no longer be mandatory.
In a relief for the gems and jewellery ecosystem hit hard by the 50% tariffs in its largest market that the US has been, the RBI has broadened the scope of lending against gold and silver collateral. Banks as well as tier-3 & 4 urban cooperative banks can now extend working capital loans to any borrower using gold as raw material, not just jewellers.
In another change in gold loans, which has been the biggest driver of credit in growth rate clipping at over 30% so far this fiscal wit July seeing a whopping 122% jump on-year in fresh disbursals, the RBI has allowed lenders to extend the repayment period for gold metal loans to 270 days from 180 days now.
It has also permitted non-manufacturing jewellers to avail gold metal loans for outsourced production. On the core capital front, the RBI has amended Basel III norms to raise the eligible limit for perpetual debt instruments (PDIs) issued in foreign currency or rupee-denominated bonds abroad. This will give lenders greater flexibility in raising additional Tier-1 capital from offshore markets.
Aligning the large exposure framework with intragroup norms for foreign bank branches, with exposures to head offices recognised only under the large exposure framework, and wider credit risk mitigation benefits. The RBI has also mandated lenders to submit credit data to bureaus every week instead of the fortnightly reporting now, along with faster error rectification and mandatory inclusion of CKYC numbers in consumer reports under which credit institutions will be required to rectify the errors in a aster named and incorporating CKYC (central KYC) numbers into consumer reports.
Another change is the norms dealing with credit risk mitigation by extending the risk mitigation benefits to a wider range of exposures. The Reserve Bank recently issued new regulations to improve the transmission of policy interest rates and ease gold loan norms, while also proposing changes to large credit exposure frameworks and credit data submission requirements. The central bank has invited public feedback on the draft circulars until October 20.
Commenting on the amendments and circulars, Anil Gupta, a senior vice-president and co-group head at Icra Ratings said 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.
“Introducing greater flexibility to reset lending rates in favour of existing customers is a welcome move and could enhance borrower benefits,” he said, adding “the switch over to a fixed rate loan can adversely impact 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.”
On plans to increase the foreign currency AT1 bonds issuance threshold, he said some large public sector banks will now have the opportunity to tap overseas markets with these instruments. The last such issuance by a public sector bank was in 2016. Since then, interest rates on domestic AT1 bonds have remained relatively favourable compared to forex 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, Gupta said.
Additionally, given the robust capital positions of banks, AT1 bonds have been minimal from private banks and relatively subdued from public sector banks. In FY25, public sector banks raised just Rs 8,000 crore through AT1 bonds, down from Rs 17,516 crore in FY24, while private banks have not issued any AT1 bonds in the past two fiscal years.