RBI Revises Norms for Small Business Finance, Loans against Gold
The Reserve Bank of India (RBI) has adjusted the policies governing small business loans to allow the spread charged on the credit risk of a borrower to be varied on a more regular basis.
It also gave banks greater leeway in lending to the businesses involved in the use of gold as a raw material. This was announced early this week with a circular of the changes.
For loans to small businesses, banks are allowed to adjust the additional interest, or spread charges based on the credit profile of a borrower, once in three years.
"Banks may reduce the other spread components for the benefit of the borrower earlier than three years," the RBI adds.
It added that banks can provide borrowers the option to switch over to a fixed-rate loan at the time of reset. In a separate set of rules, the RBI gave more fluidity in providing loans to businesses that use gold as a raw material.
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Banks are generally prohibited from lending for the purchase of gold and silver except as working capital to jewelers. Lenders can now use this provision to offer working capital to any borrower that uses gold as a raw material, the RBI said.
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Recently, RBI unveiled seven directions for lenders—three binding from October 1st and four open for consultation until October 20th. The immediate changes grant banks more leeway in lending. Interest-rate spreads can now be adjusted sooner, with certain borrower charges cut at any time rather than locked in for three years. Banks may also, if they wish, let personal-loan customers switch from floating to fixed rates at reset points—which is flexibility and not a mandate. Gold and silver lending has been broadened.
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Working-capital loans, once limited to jewelers, can now flow to all manufacturers using bullion as raw material. Smaller urban co-operatives in Tier 3 and 4 cities have been allowed into the business too, extending credit’s reach.