New Project Finance Norms to Strengthen Lenders' Guardrails
The Reserve Bank of India's new guidelines on project financing will help mitigate risks and harmonize regulations for all lenders, while easing credit cost concerns.
Project FinanceRbi GuidelinesCredit CostsFinancial RegulationsLending PracticesReal Estate NewsJun 26, 2025
The new guidelines cover both infrastructure and non-infrastructure projects, including commercial real estate and residential housing. They apply to banks, non-banking financial companies (NBFCs), housing finance companies (HFCs), urban cooperative banks, and all-India financial institutions.
The draft guidelines had proposed very stringent provisioning norms, with a 5% provisioning on all under-construction projects, which could go up to 7.5% in some scenarios. Even for operational projects, provisioning levels were mandated at 1% or 2.5%, depending on the extent of operating cash flows. However, the final directions have significantly reduced these requirements.
According to the final guidelines, only 1-1.25% provisions will be required from the date of commencement of commercial operations (DCCO), as opposed to the 5% proposed in the draft. This reduction will ease the financial burden on lenders and reduce credit costs.
Subha Sri Narayanan, a director with Crisil Ratings, noted, "Compared to the draft of May 2024, the final directions improve the ease in doing business for lenders. The provisioning requirements are significantly lower, not only in the case of under-construction projects but also for operational projects. Additionally, the guidelines are applicable only on a prospective basis. As a result, the impact on credit costs would be well below what was envisaged earlier."
The removal of the proposed six-month limit on the moratorium period after DCCO will also benefit lenders, allowing them to continue to structure loans in line with the expected cash flows of projects. Standard asset provisioning for operational projects remains in line with the extant guidelines for banks and upper-layer NBFCs, ranging from 0.4-1% depending on the segment.
However, provisioning requirements across categories remain de-linked from the credit risk profile of individual projects, as indicated by credit ratings. This is unlike the extant capital requirements for bank lending to corporates, which are linked to the credit risk profiles of the latter. The proposed provisioning requirements also remain sector-agnostic, even though various sectors may carry diverse levels of risks, including different levels of ultimate loss-given defaults.
Sonica Gupta, an associate director with the agency, stated, "There is unlikely to be a significant impact on lending rates and consequently, on the borrowing costs of under-construction projects. This is because the final directions are applicable only on a prospective basis, and hikes in the base provisioning requirement are relatively lower compared with what was envisaged in the draft guidelines."
These directions will also provide a growth fillip, with many lenders sitting on the fence thus far pending clarity on the final provisioning requirements and their applicability. All this should facilitate funding for the expected capital expenditure outlay of Rs 125-135 trillion over fiscals 2026-2030.
The increased provisioning requirements for project finance will enhance the resilience of the financial sector. Historically, the sector has faced substantial stress due to challenges in project execution, such as delays, cost overruns, and regulatory hurdles. With provisioning levels rising moderately for under-construction projects, lenders will be better equipped to absorb potential losses.
These requirements will also promote more prudent lending practices, as lenders are incentivized to evaluate project viability and creditworthiness very carefully. Directions like ensuring the availability of sufficient land/right of way under the prudential conditions related to disbursement and monitoring should ensure better lending practices by the lenders.
Notably, the incremental provisioning requirements are unlikely to pose a significant burden on lenders because their profitability and capitalization levels are strong, providing headroom to absorb the additional cost.
Frequently Asked Questions
What are the new guidelines from the Reserve Bank of India (RBI) on project financing?
The new guidelines cover both infrastructure and non-infrastructure projects, including commercial real estate. They reduce provisioning requirements and are applicable only on a prospective basis.
How do these guidelines benefit lenders?
The guidelines ease credit cost concerns by lowering provisioning requirements and removing the proposed six-month limit on the moratorium period after DCCO.
What is the impact on lending rates and borrowing costs?
The impact on lending rates and borrowing costs is expected to be minimal, as the final directions are applicable only on a prospective basis and the hikes in the base provisioning requirement are relatively lower.
How will these guidelines promote prudent lending practices?
The guidelines incentivize lenders to evaluate project viability and creditworthiness more carefully, and directions like ensuring the availability of sufficient land/right of way will ensure better lending practices.
What is the expected capital expenditure outlay over fiscals 2026-2030?
The expected capital expenditure outlay over fiscals 2026-2030 is Rs 125-135 trillion, and these guidelines should facilitate funding for this outlay.
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