Context:
The Reserve Bank of India (RBI), on June 19, 2025, released its final guidelines on project finance provisioning, increasing general provisions for loans extended during the construction phase. The new norms will take effect from October 1, 2025, and will apply only to new projects.
What is RBI’s New Project Finance Norms?
RBI’s new project finance norms, effective October 1, 2025, aim to streamline lending to infrastructure and other projects by banks and NBFCs, promoting stability and growth. The revised framework introduces a principle-based approach for resolving stress in project finance, allows flexibility in extending the date of commencement of commercial operations (DCCO), and reduces provisioning requirements during the construction phase.
Key Norms
- Commercial Real Estate (CRE) projects: 1.25% general provision
- Commercial Real Estate – Residential Housing (CRERH): 1.0%
- All other projects: 1.0% during the construction phase
- Applies uniformly to projects, including those by MSMEs and small residential housing developers
Concerns Raised
- Blanket Provisioning Irrespective of Risk
- Crisil Ratings and banking officials criticized the uniform approach, noting that the norms are not linked to individual project credit risk, unlike existing capital requirements for corporate lending which are aligned to credit ratings.
- This delinking disregards the diverse risk profiles across sectors and projects.
- Impact on Smaller Players
- MSMEs and small-scale housing projects will be disproportionately impacted.
- Bankers argue this could discourage lending to productive sectors that are vital for inclusive growth.
- Higher Cost of Infrastructure Finance
- Increased provisioning means higher capital cost for banks, who in turn may pass this cost to borrowers, making infrastructure financing more expensive.
- Sector-Agnostic Norms
- Critics say that diverse sectors with differing risk levels and loss-given-defaults should not be treated uniformly under the same provisioning requirement.
