How RBI’s New Loan Rate Rules Transform Your Lending Operations

The Reserve Bank of India (RBI) announced regulatory amendments to the structure governing loan rate rules, lending against gold/silver collateral, and Perpetual Debt Instrument (PDI). Three significant regulatory changes took effect on October 1, 2025; four remain open for consultation until October 20, 2025.

The proposed reform aims to modernise the lending framework by easing lending norms while ensuring strong financial oversight and stability. The latest modifications will also help borrowers obtain cheaper and more flexible loans, as well as widen access to credit against gold. For lenders, it will open up capital-raising avenues and provide them more flexibility in their operations.

To understand the practical consequences, let’s examine the new loan rate rules and their impact on your lending operations.

RBI’s New Loan Rates and Their Impact on Lending Operations

The central bank’s new loan rate rules can significantly impact borrowers and lending operations across all financial institutions (FIs) engaged in granting all types of loans. Below, we discuss three changes that come into effect immediately and their impact on your lending operations.

How New Interest Rate Rules Affect Floating-Rate Loans

The new norms allow banks to reduce certain spread components on floating-rate loans sooner than the previous three-year limit. Lenders may also offer (but are not required to) the option to let borrowers switch from a floating to a fixed rate during interest rate resets. These changes apply to personal, retail, and (Medium, Small, and Micro Enterprise) MSME loans.

Using a single, cloud-based LMS that manages everything, from approving vehicle loans to complex business fundings, detecting fraud to managing collections, can help lenders operate seamlessly and adapt to changing regulations effortlessly.

What Does it Mean for You?

The option to reduce the spread (non-credit risk portion) before the three-year lock-in period for all retail loans linked to external benchmarks will impact the lenders in the following ways:

• Lenders have greater pricing flexibility to proactively modify loan rates and retain borrowers who have demonstrated responsible credit behaviour.
• Lenders can now adjust spreads quickly, without waiting for three years, allowing them to be more competitive. With the amended loan rate rules, lenders have greater flexibility to respond more quickly to changes in RBI repo rates, market liquidity conditions, and their competitors.
• Spread flexibility enables lenders to manage their portfolios more effectively by segmenting risk-return across different customer groups.

However, the changes in this lending rate rule could also pose some challenges, which are discussed below.

• The demand to reduce the spread from borrowers could put pressure on Net Interest Margins, hurting profitability for lenders.
• Switching from a floating to a fixed rate regime or vice versa adds to operational complexities and overhead costs. Lenders must have systems in place that can manage these switches and workflows. Finezza offers a comprehensive Loan Management System that’s flexible, agile, and allows easy restructuring of loans, to facilitate the switchover from one loan regime type to another.
• A large number of borrowers switching from floating to fixed rate, while the FI’s funding remains floating, could result in an interest rate mismatch.
• The switch over from a fixed-rate loan could adversely impact the profitability of banks, especially if such a reset happens at the bottom of the interest rate cycle. However, lenders have the discretion to provide such options to borrowers based on their liability profile, which gives them the flexibility to manage these transitions strategically, keeping in mind the profitability aspect.

Beyond interest rate flexibility, the RBI has also expanded lending opportunities.

How Gold and Silver Collateral Rules Expand Lending Opportunities

Before October 1, 2025, working capital loans collateralised by gold or silver were mainly extended to jewellers. The new norms allow any manufacturer using gold or silver as raw material to access these working capital loans. Smaller urban cooperative banks can also participate in this lending.

What Does it Mean for You?

The central bank has expanded lending against gold and silver collateral, allowing lenders to finance purchases of primary gold or silver by a wider variety of businesses, not just jewellers. Now, Tier-3 and Tier-4 urban co-operative banks can also extend these working capital loans to any borrower using gold as a raw material, impacting lenders in the following ways:

• This amendment expands eligibility for bullion-backed loans, making credit more accessible to a broader range of businesses. Lenders can offer credit to a larger customer base as new business segments become potential customers, providing lenders with an opportunity to expand their operations. Scalable cloud-based loan origination solutions allow lenders to scale up their operations quickly without extensive infrastructure.
• Gold and silver-backed loans are more secure, as bullion is highly liquid, which helps lenders improve their portfolio quality and reduce risks compared to unsecured working capital loans.
• The new loan rate rules also facilitate deeper penetration as lenders in smaller towns can also enter this space, allowing them to diversify their portfolios.

Capital-Raising Regulations: New Tier 1 Capital Options for Lenders

The central bank has announced changes to Basel III Capital Regulations – Perpetual Debt Instruments (PDI) in Additional Tier 1 Capital, applicable to scheduled commercial banks (excluding Regional Rural Banks).

As per the revised guidelines, lenders can use foreign currency and overseas rupee bonds as Additional Tier 1 (AT1) capital. This increases capital buffers, diversifies funding sources, and adds to Tier 1 capital from global markets.

What Does it Mean for You?

The relaxation in capital-raising rules impacts the lending operations in the following ways:

• Lenders can now expand their credit portfolios faster without breaching capital adequacy norms. Access to foreign investors diversifies funding resources and reduces reliance on domestic capital.
• Lenders can raise capital at reduced cost and pass on the benefit to borrowers, helping lenders gain a greater foothold, especially in the price-sensitive segments.
• Lenders can improve their market share by offering more competitive loan products.

Conclusion

The RBI’s new loan rate rules will bring about greater transparency and shift focus towards borrower-centric practices and efficient monetary policy transmission. While offering an opportunity to expand their operations and gain customer trust, these changes pose new operational, technological, and compliance demands on lenders. Early adopters of technology-driven compliance solutions are already gaining market advantage in the post-October 1 landscape.

Having a reliable technological partner like Finezza, which offers scalable and flexible solutions that adapt to changing regulatory guidelines and policies, can help you embrace these reforms and ensure a superior customer experience.

The Loan Management System from Finezza supports multi-loan types, flexible repayment frequencies, and loan restructuring, apart from other unique features.

Proactively upgrading your infrastructure and enhancing customer communication can help you maintain profitability and retain customer loyalty in this evolving regulatory environment.

Contact us today to discover how Finezza’s solutions can help you navigate these regulatory changes seamlessly.