RBI relief for project finance, only 1% provision in construction phase

Banks welcome RBI's final project finance guidelines that lower provisioning to 1 per cent during construction and exempt existing projects from higher requirements

In a huge relief to lenders, including commercial banks, the Reserve Bank of India (RBI) has mandated general provision of only 1 per cent of funded outstanding during the construction phase for all projects except for commercial real estate (CRE), as compared to 5 per cent proposed in the draft norms released in May last year. 

The final norms on project finance, released on Thursday, would come into effect from October 1, 2025, the RBI said. 

For CRE, the general provision requirement would be 1.25 per cent in construction phase while it would be 1 per cent for CRE-Residential Housing (RH). 

During the operational phase — that is after commencement of repayment of interest and principal — the standard asset provisioning requirement will reduce to 1 per cent for CRE, 0.75 per cent for CRE-RH, and 0.4 per cent for other project exposures. At present, standard asset provisioning for all projects except CRE is 0.4 per cent. For CRE, it is 1 per cent. 

The draft norms had proposed that the provisioning can be cut to 2.5 per cent in the operational phase and further to 1 per cent of the funded outstanding provided that the project has a positive net operating cash flow that is sufficient to cover current repayment obligation to all banks. This will apply if the total long-term debt of the project with the lenders has declined by at least 20 per cent from the outstanding at the time of achieving date of commencement of commercial operation (DCCO). 

 

Importantly, the RBI clarified that the increased provisioning requirement was not applicable for existing projects. The draft norms proposed higher provision for existing projects too.

 

For under-construction projects where the aggregate exposure of the lenders is up to ₹1,500 crore, no individual lender should have an exposure which is less than 10 per cent of the aggregate exposure.

 

“For projects where aggregate exposure of all lenders is more than ₹1,500 crore, the exposure floor for an individual lender shall be 5 per cent or ₹150 crore, whichever is higher,” the final norms said.

 

“Final guidelines on project finance comes as a relief to the lenders as, for operational projects, the extant requirement continues at 0.4 per cent, which is lower than 1-2.5 per cent indicated in the earlier draft,” said A M Karthik, senior vice president & co-group head, financial sector ratings, Icra Ltd.

 

“Limited impact expected on NBFCs (non-banking financial companies) as sufficient provisions are provided as per the expected credit loss assessment, and provisioning at present is closer to the requirement, according to the guidelines. Also, the provisions are applicable prospectively from October 2025 and hence overall impact for lenders shall be limited,” Karthik added. 

 

The norms also said a lender should ensure availability of sufficient land/right of way for all projects before disbursement of funds, which should be minimum 50 per cent for all infrastructure projects under PPP (public-private partnership) model, and 75 per cent for all other projects — non-PPP infrastructure, and non-infrastructure, including CRE & CRE-RH. “For transmission line projects, as decided by a lender,” the norms said.

 

On resolution of stress, the norms said lenders should monitor the performance of the project and any build-up of stress on an ongoing basis. They (lenders) should be expected to initiate a resolution plan well in advance, the norms added.

 

“Occurrence of a credit event (default) with any of the lenders during the construction phase shall trigger a collective resolution in terms of the Prudential Framework,” the norms said, adding that lenders have been asked to undertake a prima facie review of the debtor account within 30 days from the date of default.

 

On resolution plans involving extension of original or extended DCCO, the same has been allowed to extend by three years for infrastructure projects, and two years for non-infra ones. The extension of DCCO is allowed keeping in mind cost overruns and change in scope and size of projects.  READ: Banks' supervisory data quality index improved in March 2025, says RBI

 

Even if the loans remain standard after deferment of DCCO, the norms mandated that lenders should make additional specific provisions of 0.375 per cent for infrastructure project loans and 0.562 per cent for non-infra project loans (including CRE and CRE-RH), for each quarter of deferment, over and above the applicable standard asset provision.

 

This additional provisioning requirement was aimed at bringing discipline and enhancing project management, said Rajkiran Rai G, managing director of infra financier Nabfid.

 

“If the resolution plan involving change in DCCO is not successfully implemented… then the account shall be downgraded to NPA (non-performing asset) immediately,” the RBI said.