R. Suryamurthy
The Reserve Bank of India (RBI) has issued new “Reserve Bank of India (Project Finance) Directions, 2025,” set to take effect on October 1, 2025. These new guidelines aim to strengthen risk management in project financing and standardize regulations across all regulated entities (REs), including banks, non-banking financial companies (NBFCs), urban co-operative banks (UCBs), and All India Financial Institutions (AIFIs).
The final directions reveal a significantly softened provisioning regime compared to the earlier draft. Initially, a blanket approach was proposed, which included provisioning as high as 5-7.5%. However, the new norms introduce a staggered provisioning structure for under-construction loans. REs will now maintain a base provision of 1% for infrastructure loans and 1.25% for commercial real estate (CRE) loans. For each quarter of project delay, incremental provisions of 0.375% for infrastructure and 0.5625% for CRE will apply, potentially increasing total provisioning by 1.5-2.25% over a one-year delay. This approach allows lenders to build buffers proportionate to delays without front-loading costs.
Once projects become operational, loans will revert to standard provisions of 0.40% for infrastructure, 0.75% for residential CRE, and 1% for other CRE, which are lower than the draft proposal’s suggestion of up to 2.5% in some scenarios. These revisions are expected to significantly reduce the potential capital impact on lenders, addressing concerns that the draft norms might have made project loans prohibitively expensive and dampened bidding appetite from infrastructure developers.
A key relief for lenders is the prospective application of these guidelines. Projects with financial closure before October 1, 2025, will continue under the earlier regime unless a fresh credit event occurs, thereby avoiding provisioning shocks for existing portfolios.
Strengthening Lender Discipline and Risk Management
To ensure greater accountability and participation, the RBI has mandated minimum exposure thresholds within project consortia. For loans up to ₹1,500 crore, each lender must hold at least 10% of the total debt. For larger projects, the minimum is 5% or ₹150 crore, whichever is higher. This initiative, described as ensuring “skin in the game,” aims to encourage active monitoring and engagement in resolutions by all participants.
The RBI has also introduced a principle-based, harmonized stress resolution framework. To prevent delays in recognizing stress, “credit events” will trigger a resolution plan within 30 days, with implementation required within 180 days.
Impact on Lenders and the Financial Sector
Mr. Sanjay Agrawal, Senior Director at CareEdge Ratings, noted that the new base provision (1% for infra, 1.25% for CRE) is higher than the previous 0.4% for infra loans (1% for CRE), leading to a modest rise in capital cost for banks, though existing loans are grandfathered. He estimates the impact of incremental provisioning to be around 7-10 basis points (bps) for public sector banks and up to 3-5 bps for private sector banks in terms of credit cost per net advances.
Crisil Ratings’ Director, Subha Sri Narayanan, stated that the final directions improve the ease of doing business for lenders due to lower provisioning requirements and prospective applicability. The removal of the proposed six-month limit on the moratorium period after the Date of Commencement of Commercial Operations (DCCO) will also benefit lenders by allowing them to structure loans in line with project cash flows.
While the provisioning requirements are still de-linked from individual project credit risk profiles, the increased provisioning for project finance is expected to enhance the resilience of India’s financial sector. Historically, the sector has faced significant stress due to project execution challenges like delays and cost overruns. These new requirements are anticipated to promote more prudent lending practices and better equip lenders to absorb potential losses. The strong profitability and capitalization levels of lenders are expected to provide sufficient headroom to absorb the additional costs.
The implementation of these directions, scheduled for October 2025, provides lenders with time to adjust systems, recalibrate pricing, and manage balance sheet impact. Experts believe these changes will also provide a growth fillip, facilitating funding for the anticipated capital expenditure outlay of ₹125-135 lakh crores over fiscals 2026-2030.
(R. Suryamurthy is a senior economic journalist based in Delhi.)
