How borrowers will benefit from the RBI’s new loan rate rules: Everything you need to know

Under the existing norms, banks are required to benchmark all floating-rate personal or retail loans (such as housing and auto loans) and floating-rate loans to Micro, Small, and Medium Enterprises (MSMEs) to an external benchmark. Although banks can decide the spread over the external benchmark, other than the credit risk premium, all components of this spread can only be altered once every three years.

The amended directions now allow banks to reduce the spread components earlier than the previously mandated three-year period to benefit the borrower.

"Banks may reduce the other spread components for the benefit of the borrower earlier than three years," said the amended directions on interest rate on advances.

It further said banks may, at their discretion, provide the option to switch over to a fixed rate at the time of reset.

The current norms, with respect to equated monthly instalments (EMI) based personal loans, require banks to provide a mandatory option to the borrowers at the time of reset of interest rates to switch over to a fixed rate.

The central bank has also allowed banks to grant need-based working capital loans to manufacturers using gold as raw material, extending the provision currently available only to jewellers.

Banks are generally prohibited from lending for the purchase of gold/silver in any form, or lending against the security of primary gold/silver.

However, a carve-out has been allowed by the RBI for scheduled commercial banks (SCBs) for granting working capital loans to jewellers.

A bank extending such finance shall ensure that borrowers do not acquire or hold gold for investment or speculative purposes, it said.

The central bank also released directions, which revise the existing eligible limit applicable to perpetual debt instruments (PDI) denominated in foreign currency/rupee-denominated bonds overseas, thereby providing greater headroom to banks for augmenting their Tier 1 capital via overseas markets.

All these directions will come into force from October 1, 2025.