RBI Reduces Provisioning Requirement for Project Finance, Effective from October 1, 2025
The Reserve Bank of India (RBI) has unveiled its project financing directives, stipulating that lenders must maintain a general provisioning of 1.25% on commercial real estate and 1% each on commercial real estate — residential housing, and other portfolio during the construction phase. These directives will come into effect from October 1, 2025.
This move was much lower than the 5% provisioning initially proposed in the draft rules for all project finance, irrespective of the sector-specific default risk. Stakeholders had expressed reservations about the higher proposed rate, and the RBI has taken these concerns into consideration.
Banks will have to maintain 1% general provisioning 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, the central bank said. This tiered approach aims to balance the need for prudential risk management with the financial viability of projects.
In May 2024, the RBI consulted with around 70 entities, including banks, NBFCs, and industry associations, on the draft guidelines for the ‘Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances — Projects Under Implementation.’ The feedback received from these consultations played a crucial role in shaping the final directives.
The new directives will also allow banks to extend the permissible date of commencement of commercial operations (DCCO) with an overall ceiling of two and three years for infrastructure and non-infrastructure sectors, respectively. This flexibility is intended to provide more breathing room for projects facing delays due to unforeseen circumstances.
Under-construction projects where financial closure has already been achieved will continue to be guided by the extant provisioning norms, the RBI added. This ensures that ongoing projects are not unduly impacted by the new rules.
The RBI's decision to reduce provisioning requirements is expected to provide a significant boost to the real estate and construction sectors. By lowering the financial burden on lenders, it should encourage more investment in these areas, ultimately contributing to economic growth and development.
Overall, the new provisioning requirements strike a balance between maintaining financial stability and supporting the growth of key sectors. The RBI's proactive approach to stakeholder engagement and feedback has resulted in a set of guidelines that are both practical and effective.
