Source: BS
Context:
The Reserve Bank of India (RBI) has announced new guidelines for small business loans, giving banks greater flexibility in adjusting the additional interest or spread charged over the loan term. Previously, banks could revise the spread linked to a borrower’s credit risk only once every three years.
Key Highlights:
Greater Flexibility in Loan Spreads
- Previous rule: Banks could revise the spread (additional interest over the base rate linked to borrower credit risk) only once every three years.
- New rule: Banks can now reduce other spread components earlier, benefiting borrowers.
- Additional option: Borrowers can switch to a fixed-rate loan at the time of reset.
Expanded Lending Using Gold
- Earlier restriction: Banks could not provide loans for purchasing gold/silver, except working capital loans to jewellers.
- New provision: Banks can now extend working capital loans to any business using gold as a raw material, broadening credit access beyond the jewellery sector.
Other Directions for Strengthening Lending
- Seven directions issued:
- Three mandatory
- Four open for consultation (feedback until October 20, 2025)
- Key measures:
- Expanded role of smaller urban co-operative banks in lending to enhance financial inclusion.
- Capital rules eased: Banks can use foreign-currency and overseas-rupee bonds as Additional Tier 1 (AT1) capital, facilitating access to global markets.
- Faster credit reporting: Data submissions will move from fortnightly to weekly, integrating unique CKYC identifiers for more accurate and timely reporting.
Key Definitions
| Term | Definition | Significance |
|---|---|---|
| Spread | Additional interest rate charged over the base/reference rate based on borrower credit risk | Determines cost of borrowing; now adjustable before 3-year period |
| Fixed-rate loan | Loan with interest rate fixed for the tenure | Provides interest stability to borrowers |
| Working Capital Loan | Short-term loan to meet daily operational expenses | Supports liquidity needs of businesses |
| Additional Tier 1 (AT1) Capital | Capital instruments that absorb losses while the bank remains a going concern | Helps banks meet regulatory capital requirements; can be raised via foreign/overseas-rupee bonds |
| CKYC (Central Know Your Customer) | Centralized database of customer identity information | Ensures accurate borrower data and faster reporting |
| Urban Co-operative Banks | Local banks serving urban areas, often MSMEs | Expanded role increases credit access for small businesses |
