RBI Eases Project Finance Provisions to 1-1.25% from October 1
The Reserve Bank of India (RBI) has issued final directions on project finance, significantly reducing the general provision requirements for banks. The new relaxed norms, effective from October 1, will help alleviate financial stress and boost lending in the real estate sector.
RbiProject FinanceReal EstateProvisionsStress ResolutionReal EstateJun 19, 2025
In February, RBI Governor Sanjay Malhotra had announced that project financing norms would be deferred by a year and would not be implemented before the end of March 2026. This is the second major regulatory step taken by the RBI under Malhotra, following the postponement of the expected credit loss guidelines.
The new regime for resolving exposure to stressed assets has been harmonized across regulated entities. Under the new norms, banks will have to maintain a 1% general provision on commercial real estate projects during the operational phase after the commencement of repayment of interest and principal, 0.75% on residential housing, and 0.40% on all other projects.
These provisions are significantly lower than what was initially proposed in the draft norms. The draft norms suggested that banks set aside a provision of 5% of the loan amount during the construction phase, which would be reduced to 2.5% once the project becomes operational and then down to 1% after the project starts generating sufficient cash to cover lenders' repayment.
AM Karthik, a senior vice-president and co-group head of financial sector ratings at Icra Ratings, commented, “The final guidelines come as a relief to lenders as for operational projects, the existing requirement continues at 0.4%, which is lower than the 1-2.5% indicated in the earlier draft. For under-construction projects, provisions are kept at 1%, compared to the 5% suggested in the draft. This is, however, higher than the 0.4% applicable for banks currently.”
Karthik also noted that the impact on Non-Banking Financial Companies (NBFCs) is likely to be limited, as they already provide sufficient provisions as per the expected credit loss assessment. Since the new provisions are prospective from October 1, 2025, the overall impact for lenders is expected to be minimal.
According to the final regulations, if the date of commencement of commercial operations is deferred and classified as standard, lenders will have to make additional specific provisions of 0.375% for infrastructure project loans and 0.5625% for non-infrastructure project loans, including commercial and residential real estate, for each quarter of deferment.
The RBI has also emphasized the importance of continuous monitoring of project performance and the timely initiation of a resolution plan during the construction phase. Any credit event must be reported to the Central Repository of Information on Large Credits (CRILC) by the lender on a weekly basis, as well as in the CRILC Main report. The bank must also conduct a prima facie review of the debtor account within 30 days from the date of the credit event.
The central bank has clarified that the upgradation of Non-Performing Assets (NPAs) can only occur after the account performs satisfactorily after the actual date of commencement of operations. A project finance account downgraded to NPA can be upgraded after the successful implementation of the resolution plan, provided no further requests for the deferment of the date of commencement of operations are received.
Before fund disbursement, lenders must ensure that there is sufficient land availability—50% for infrastructure projects under the Public-Private Partnership (PPP) model and 75% for all other projects.
Frequently Asked Questions
What are the new provision requirements for banks on commercial real estate projects?
Banks will have to maintain a 1.25% general provision on commercial real estate projects and 1% on commercial real estate-residential housing and other portfolios during the construction phase. For the operational phase, the provision is 1% on commercial real estate, 0.75% on residential housing, and 0.40% on all other projects.
When will these new relaxed norms come into effect?
The new relaxed norms will come into effect from October 1, 2025.
What was the initial proposal for project finance provisions?
The initial draft norms proposed that banks set aside a provision of 5% of the loan amount during the construction phase, reduced to 2.5% once the project becomes operational, and then down to 1% after the project starts generating sufficient cash to cover lenders' repayment.
How will these new norms impact Non-Banking Financial Companies (NBFCs)?
The impact on NBFCs is expected to be limited, as they already provide sufficient provisions as per the expected credit loss assessment. The new provisions are prospective from October 1, 2025, which further minimizes the overall impact.
What are the requirements for land availability before fund disbursement?
Before fund disbursement, lenders must ensure that there is sufficient land availability—50% for infrastructure projects under the Public-Private Partnership (PPP) model and 75% for all other projects.
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