RBI: Gold as Raw Material for Working Capital Loans

Mumbai, Sep 30 (PTI) The Reserve Bank of India (RBI) has 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.

The Reserve Bank of India (Lending Against Gold and Silver Collateral) (1st Amendment) Directions, 2025 issued on Monday, has extended the carve-out for granting any need-based working capital requirements of a borrower that uses gold as a raw material or input in its manufacturing or industrial processing activities.

"... Scheduled Commercial Bank or a Tier 3 or 4 UCB may extend need-based working capital finance to borrowers who use gold or silver as a raw material, or as an input in their manufacturing or industrial processing activity, for which such gold or silver can also be accepted as security," the directions said.

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 has also issued Reserve Bank of India (Interest Rate on Advances) (Amendment Directions), 2025 to benefit borrowers while providing greater flexibility to lenders.

As per the extant norms, banks are required to benchmark all floating rate personal or retail loans (housing, auto), and floating rate loans extended to MSMEs, to an external benchmark.

While banks are free to decide the spread over the external benchmark, other than credit risk premium, all components of the spread can be altered only once in three years.

"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 switchover to fixed rate at the time of reset at their discretion.

The current norms, in respect of equated monthly instalments (EMI) based personal loans, requires 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 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.