RBI Tightens Project Finance Rules: Impact on Real Estate Lenders

The Reserve Bank of India (RBI) has introduced stringent project finance guidelines for the real estate sector, which became applicable from October 1. These new rules have made life difficult for lenders, including banks, Non-Banking Financial Companies (NBFCs), housing finance companies, and other RBI-regulated entities.

The guidelines mandate that whenever a lender underwrites a project, the debt-to-equity ratio must be maintained at the same level throughout the project’s lifecycle. Lenders are not allowed to extend any top-up loans over and above the originally sanctioned amount, which remains fixed.

Though the RBI wants lenders to maintain financial discipline and prevent developers from taking money out of projects midway, lenders’ hands are tied as they cannot sanction additional amounts during execution without risking client relationships, sources at lending companies said. “More often than not, the top-up loans were misused. Now developers cannot take out the money out of the projects. RBI wants that as a project lender, you should ensure developers cannot take money out of the projects and have skin in the game,” said a senior banking executive who did not want to be identified.

To circumvent the norms, some lenders have begun extending general corporate purpose (GCP) loans, asking borrowers to demonstrate end use so as to comply with RBI rules. “This will help borrowers to invest back in the same project through other companies,” the executive said. He added that earlier, instead of assessing the actual working capital gap, many lenders extended loans to suit their own needs rather than the project’s requirements. “This would stop now, and lenders could face operational issues,” he said.

Though the RBI wants lenders to sanction higher loan amounts upfront to avoid future stress, lenders find it riskier to extend larger exposures to borrowers, senior executives said. Under the guidelines, customer collections form part of equity in a project, along with land and funds brought in by the developer. For instance, if a project costs Rs 500 crore, and the developer brings in land worth Rs 100 crore, assumes collections of Rs 250 crore, and raises debt of Rs 150 crore, the debt-to-equity ratio works out to 2.5:1.5.

Given the requirement to maintain the debt-to-equity ratio throughout the project, if collections lag and developers fail to infuse additional equity, problems could arise as lenders are barred from extending fresh funding, said the chief executive of an NBFC. “RBI says the amount sanctioned at the beginning can’t be changed,” he said, adding that if the lender makes any additional provisioning, it could lead to a downgrade of the developer, resulting in the existing loan becoming a restructured account or a non-performing asset (NPA). “RBI wants lenders to take a conservative bet and give higher debt to keep projects safe. But it is easier said than done,” the CEO said, adding that it leads to a higher cost of processing a loan and higher risk.

“Lenders also need to have confidence in lending a higher amount to the particular borrower,” the CEO said. Another senior executive at an NBFC said sharp practices in the system cannot be changed overnight. “Banks, NBFCs also have pressure to lend to big borrowers. They have to maintain good relations with them,” he said.

RBI wants NBFCs to be more practical and prudent in lending, said Vishal Srivastava, managing director at Anarock Capital, adding that the norms will create discipline in the financial ecosystem.

Anand Mihir, financial services domestic consulting leader at EY India, agreed. Mihir said the RBI’s project finance framework strengthens discipline around incremental funding during the construction phase and reinforces adherence to the original project capital structure. Where timelines slip and costs increase, lenders may fund cost overruns of up to 10% of the original project cost (over and above IDC) while retaining standard asset classification, but this is expected to be done through a standby credit facility sanctioned at the time of financial closure, rather than through ad hoc additional lending later in the project cycle, he said.

“Importantly, after such funding, financial parameters such as the debt-equity ratio and credit metrics must remain unchanged or improve in favor of lenders,” he said. For NBFCs, this implies greater discipline and stronger upfront appraisal rigour. Lenders can no longer expand exposures during the project lifecycle without clear linkage to the original financial closure plan or demonstrable equity infusion by developers, reducing the risk of hidden leverage build-up and asset quality deterioration. “While this may slow down discretionary funding increases, it also improves risk monitoring, enhances consistency in project lending, and reduces inter-creditor disputes,” he said.

For developers, well-capitalised players with disciplined equity infusion and cost controls will adapt smoothly. Highly leveraged developers will need to plan projects more conservatively and build adequate contingencies, he said, adding: “Overall, the measures support long-term stability and credibility in real estate financing.”