RBI Introduces New Norms To Speed Up Transmission Of Interest Rates

The Reserve Bank of India (RBI) on Monday unveiled a set of regulatory changes designed to improve the transmission of policy rates, ease gold loan norms, and relax large credit exposure rules. Of the seven announced changes, three will come into effect from October 1, while the remaining four have been released as draft proposals for public feedback.

Under the revised guidelines on interest rates for advances, banks will now be permitted to reduce spread components on floating-rate loans even before the existing three-year lock-in period, a move aimed at benefiting borrowers. This step is expected to accelerate the transmission of policy rate cuts, potentially lowering borrowers’ EMIs or interest payments. In addition, banks may offer borrowers the choice

to switch to fixed-rate loans at the time of interest rate resets, though such an option will no longer be mandatory.

Further, the RBI has expanded the scope of lending against gold and silver collateral, allowing banks as well as tier-3 and tier-4 urban co-operative banks to extend working capital loans to any borrower using gold as a raw material, not just to jewellers.

Basel III & Large Exposure Changes

The central bank has also amended Basel III capital regulations, raising the eligible limit for perpetual debt instruments (PDIs) issued in foreign currency or rupee-denominated bonds overseas. This move is expected to give banks greater flexibility to raise tier-1 capital from offshore markets.

Draft Proposals for Feedback

Among the draft measures, the RBI has proposed:

• Extending the repayment period for Gold Metal Loans (GML) to 270 days from 180 days.
• Allowing non-manufacturing jewellers to avail GML for outsourced production.
• Aligning the Large Exposures Framework (LEF) with Intragroup Transactions and Exposures (ITE) norms for foreign bank branches in India. Under the proposal, exposures to head offices will be considered only under LEF, while credit risk mitigation benefits will be extended to a wider set of exposures.
• Requiring credit institutions to submit data to credit bureaus weekly instead of fortnightly, improving the timeliness and accuracy of credit data. The draft also calls for faster error rectification and inclusion of CKYC numbers in consumer reports.

The RBI has invited public comments on the draft circulars until October 20.