RBI changes loan rules: New norms likely to boost policy transmission, say experts, Pg15.

Key Highlights:

• RBI allows banks to reduce the spread component on loans offered before three years, effective October 1.
• The new norms aim to benefit existing customers and improve monetary policy transmission.
• Borrowers can now switch from floating interest rates to fixed rates on personal loans at the time of interest rate reset.
• RBI now permits banks to grant working capital loans to jewellers using gold as raw material.

Detailed Insights:

• The spread is the additional percentage lenders add to benchmark interest rates to determine the final lending rate, factoring in credit risk, operating cost, and loan tenure.
• Previously, the spread charged to a borrower could only be altered once every three years, limiting banks' ability to offer competitive rates to existing customers.
• The RBI introduced the External Benchmark-Based Lending Rate (EBLR) in October 2019, linking retail loans to the repo rate.
• Allowing borrowers to switch to fixed rates can impact bank profitability, especially at the bottom of an interest rate cycle, so the RBI has left this option to the discretion of lenders.
• The repo rate was reduced by 100 bps between February and June 2024, but the weighted average lending rate on fresh loans only declined by 53 bps.
• Extending working capital loans to jewellers aims to support businesses using gold as raw material in manufacturing.

Key Concepts Involved:

• Repo Rate: The rate at which commercial banks borrow money from the RBI.
• Monetary Policy Transmission: The process by which changes in the policy interest rate affect economic activity.
• Working Capital Loan: A loan taken to finance a company's everyday operations.