Banks get more flexibility in small business and gold-based loans: RBI

The Reserve Bank of India has eased norms for small business loans and working capital lending to jewellers, allowing banks to adjust spreads more frequently and expand credit access. Feedback on these measures is open until October 20

New Delhi: The Reserve Bank of India (RBI) issued new guidelines for small business loans, increasing the lending flexibility for banks, in adjusting the additional interest or spread charged over the loan term.

The RBI has also eased lending restrictions for businesses that depend on gold as a raw material. “Banks are generally prohibited from lending for the purchase of gold or silver in any form, or lending against the security of primary gold or silver. However, a carve-out has been allowed for Scheduled Commercial Banks (SCBs) for granting working capital loans to jewellers,” the statement said.

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Regarding business loans, banks could previously revise the spread linked to a borrower’s credit risk only once every three years. Under the new rule, banks may now reduce other spread components earlier than the three years to benefit borrowers. Additionally, borrowers will now have the option to switch to a fixed-rate loan at the time of reset.

New regulations allow banks to provide working capital loans to any business using gold as a raw material, expanding credit access beyond the jewellery sector, which previously had limited exceptions for financing gold and silver purchases.

RBI issued seven directions for lenders, three mandatory and four open for consultation. The RBI has invited feedback on these measures until October 20. The central bank has expanded the role of smaller urban co-operatives in lending, extending the reach of credit. Capital rules have also been eased, with banks now allowed to use foreign-currency and overseas-rupee bonds as Additional Tier 1 capital, making it easier to access global markets.

The RBI’s direction mandated the submission of credit information by Credit Institutions (CIs) to Credit Information Companies (CICs) at fortnightly or shorter intervals. The RBI has now proposed to transition to weekly credit information submission by CIs to CICs.

The draft amendments also mandate measures to facilitate faster data submission and error rectification by the CIs, the release said. Further, to facilitate aggregation of credit information by CICs, it is proposed to capture the Central Know Your Customer (CKYC) number in a separate field in the reporting format of the consumer segment, the release noted.