On June 19, 2025, the Reserve Bank of India (RBI) notified the Reserve Bank of India (Project Finance) Directions, 2025 (“Directions”), which will take effect from October 1, 2025. The Directions emerge from extensive consultations with multiple stakeholders. They build on the draft guidelines released on May 3, 2024, which proposed a new prudential framework for income recognition, asset classification, and provisioning for project loans.
Below is a detailed breakdown of the Directions and their implications:
1. General Guidelines
The Directions introduce a principle-based regime for project finance, aiming to provide flexibility while maintaining prudential safeguards.
Key Provisions:
- Uniformity across lenders: Harmonized rules for banks and non-banking financial companies (“NBFCs”) regarding project finance exposures.
- Principle-based approach: Shifting away from prescriptive regulations to allow regulated entities (“REs”) such as banks and NBFCs to exercise commercial judgment in project assessment and stress resolution.
Impact:
This approach will empower lenders to make project-specific decisions, particularly in complex infrastructure and non-infrastructure projects. However, it also places greater responsibility on lenders to conduct robust risk assessments.
2. Prudential Conditions for Sanction, Disbursement & Monitoring
The Directions emphasize sound credit appraisal and set out rules on how lenders should sanction, disburse, and monitor project loans:
Key Provisions:
- Sanction conditions:
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- Lenders must ensure financial closure and clarity on original Date of Commencement of Commercial Operations (DCCO) before disbursement of funds.
- Loan agreement should incorporate project specific disbursement schedule vis-à-vis stage of completion of project, and post DCCO repayment schedule should factor in the initial cash flows. Repayment schedule not to exceed 85% of project’s economic life.
- All applicable approvals/clearances for the project are obtained before financial closure, other than those based on milestones.
- Disbursement conditions:
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- Disbursement shall be subject to availability of land/right of way for the project, to the extent of atleast 50% for PPP-infrastructure projects, 75% for all other projects (i.e. non-PPP infrastructure, and non-infrastructure including Commercial Real Estate (“CRE”) and CRE-Residential Housing (“CRE-RH”), and for transmission line projects, as may be decided by a lender.
- For PPP-infrastructure projects, disbursements of funds to be done only after declaration of the appointed date or its equivalent, subject to techno-economic viability study for more than Rs. 100 crore total exposure.
- Monitoring:
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- Lenders must put in place regular progress reviews through site visits, reports from independent engineers, and monitoring committees to ensure that disbursal is proportionate to stage of completion, the progress in infusion of equity and other finance sources and receipt of remaining applicable clearances.
- Any material delay or cost overrun must trigger early corrective actions, including restructuring or stress resolution.
Impact:
The directions on sanctions, disbursement conditions and monitoring of project finance aim to bring discipline, flexibility and transparency for REs and the borrowers/project developers.
3. Prudential Norms for Resolution
The Directions provides a principle-based mechanism for resolving stressed project loans.
Key Provisions:
- Resolution of Stress:
- Project performance and stress monitoring to be done by REs on an ongoing basis, and if required, resolution plan to be initiated well in advance.
- Occurrence of a credit event (as broadly defined under the Directions) shall trigger a collective resolution in terms of the Prudential Framework for Resolution of Stressed Assets issued by RBI on June 7, 2019, as updated from time to time, (“Prudential Framework”).
- Any credit event shall be reported to the Central Repository of Information on Large Credit by the REs, within the prescribed timeframe.
- Prima facie review to be undertaken within 30 days of such credit event (“Review Period”). Conduct of lenders during the Review Period, signing of an Inter Creditor Agreement and implementation of a resolution plan to be guided by the Prudential Framework.
- Where a resolution plan involving extension of DCCO is implemented for a project finance account, lenders may continue to classify such account as ‘standard’ subject to the below conditions prescribed in Permitted DCCO Deferment, Permitted Cost Overrun Financing and Change in Scope and Size. All required documentation, security creation and perfection shall be completed in accordance with the resolution plan as well as the new capital structure and/or changes in financial agreement to be reflected in the books of lender and the debtor before expiry of 180 days from the end of Review Period.
- If the resolution is not successfully implemented as above, then the project finance account shall be downgraded as ‘NPA’.
- Permitted DCCO Deferment:
- Maximum permissible extension for infrastructure projects: upto 3 years.
- Maximum permissible extension for non-infrastructure projects (including CRE and CRE-RH): upto 2 years.
- REs are given commercial discretion to extend DCCO within these limits.
- Permitted Cost Overrun Financing:
- Maximum of 10% of the original project cost financed through Standby Credit Facility (“SBCF”) specifically sanctioned on financial closure.
- SBCF not sanctioned earlier for infrastructure projects to be subject to additional risk premium.
- Financial parameters like debt-equity ratio, external credit rating (if any) to remain unchanged or be enhanced post such cost overrun funding.
- Change in Scope and Size:
- The rise in project cost excluding any cost-overrun is 25% or more of the original outlay.
- Lender to re-assess the viability of the project before approving change in scope and deferment of DCCO.
- No credit rating downgrade by more than one notch, or in case of unrated project debt, it shall be externally rated investment grade if in aggregate all lender exposure is equal to or greater than Rs.100 crores.
Impact:
This is a major reform as it replaces the fragmented, institution-specific approaches with a harmonized resolution framework, thereby improving efficiency in stress management and reducing inter-creditor conflicts. The rationalized DCCO extensions strike a balance between project realities and the need to curb indefinite delays.
4. Provisioning Norms
The Directions provide for a phase-wise provisioning norms for projects:
Key Provisions:
- Provisioning Norms for Construction Phase:
- Standard asset provisioning set at 1% for most projects (including CRE-RH projects) under construction phase.
- For CRE projects: 1.25% provisioning under construction phase.
- Provisioning will increase progressively with each quarter of Permitted DCCO Deferment – 0.375% for infrastructure project loans, 0.5625% for non-infrastructure project loans for each quarter of such deferment – such increased provisioning to be reversed upon commencement of commercial operations.
- Provisioning Norms for Operational Phase – after commencement of repayment of interest and principal:
- CRE projects: 1%
- CRE – RH: 0.75%
- Other project exposures: 0.40%
- Projects with Financial Closure Already Achieved:
- Such projects will continue under existing provisioning norms to ensure seamless transition.
Impact:
The tiered provisioning system discourages repeated DCCO extensions while protecting lenders’ balance sheets. The reduced provisioning levels for operational projects reflect the lower risk profile compared to under-construction projects. This will likely free up capital for lenders, encouraging them to finance long-term infrastructure and industrial projects.
5. Miscellaneous Provisions
Key Provisions:
- Alignment with Existing Frameworks: The new Directions coexist with current provisioning norms for projects already at financial closure, ensuring continuity.
- Regular Disclosures: REs must report project-loan performance, DCCO extensions and provisioning levels in their financial statements and periodic returns to the RBI.
Impact:
The careful alignment with ongoing projects avoids regulatory disruptions. Continuous regulatory disclosures and RBI oversight shall ensure effective implementation of these Directions.
Conclusion
The Directions mark a significant shift in India’s project finance landscape, moving towards a principle-based and harmonized regulatory regime. The focus on flexibility in DCCO extensions, rationalized provisioning, and standardized stress resolution is expected to improve lender confidence in financing large projects, ensure timely completion of infrastructure and non-infrastructure projects, and strengthen the overall health of project finance portfolios of the REs.
As the Directions come into effect from October 1, 2025, it will be critical for REs to update their credit appraisal, monitoring, and resolution strategies to align with the new framework. The Directions can be accessed here.
Author: Indrajit Mishra (Senior Partner) is a part of the Debt Capital Market, Banking and Finance Practice at the Mumbai office.
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