RBI Allows Banks to Offer Working Capital Loans to Manufacturers Using Gold as Raw Material

In a significant regulatory move aimed at boosting manufacturing and industrial growth, the Reserve Bank of India (RBI) has permitted banks to extend working capital loans to companies that use gold as a raw material in their production processes. This relaxation, previously limited to jewellers, is part of a broader reform package unveiled on September 29, 2025, which also includes amendments to interest rate guidelines and capital-raising norms for banks. The revised norms, effective October 1, 2025, are expected to enhance financial flexibility for both borrowers and lenders.

Key Policy Change: Working Capital Loans Against Gold

The RBI has amended its guidelines under the Reserve Bank of India (Lending Against Gold and Silver Collateral) (1st Amendment) Directions, 2025, allowing,

• Scheduled Commercial Banks (SCBs) and Tier 3 or 4 Urban Cooperative Banks (UCBs) to grant need-based working capital loans to manufacturers and industrial units.
• These loans can be secured against gold or silver used as raw materials or inputs in production processes.
• The provision is an extension of an existing carve-out that was earlier applicable only to jewellers.

Importantly, banks must ensure that,

• Borrowers do not acquire or hold gold for investment or speculative purposes.
• The financing is strictly linked to industrial or manufacturing activity.

Flexibility in Interest Rate Regulations

The RBI also issued amendments under the Reserve Bank of India (Interest Rate on Advances) (Amendment Directions), 2025, aimed at benefiting borrowers,

• Currently, banks benchmark all floating-rate retail and MSME loans (e.g., housing, auto loans) to an external benchmark.
• Banks can revise non-credit risk components of the spread earlier than the three-year period (previously mandatory).
• They may also offer borrowers the option to switch to a fixed interest rate at the time of reset, providing greater repayment flexibility.

Boost to Banks’ Capital Raising Capacity

• To strengthen the banking sector, RBI also revised rules for Perpetual Debt Instruments (PDI) and foreign currency/rupee-denominated bonds issued overseas.
• The eligible limit for such instruments has been enhanced, offering banks greater headroom to raise Tier 1 capital from international markets.
• This change is expected to improve liquidity and support credit expansion in the economy.

Effective Date and Implementation

• All new directions — including those on lending against gold, interest rate adjustments, and capital instruments — will come into force from October 1, 2025.
• These measures reflect RBI’s focus on promoting industrial financing, protecting borrowers’ interests, and strengthening banking resilience.