RBI Eases Project Finance Norms

In a significant move offering relief to lenders, the Reserve Bank of India (RBI) has finalized its project finance norms with a much-lowered general provisioning requirement for new project loans. The revised guidelines will come into effect from October 1, 2025, and mark a substantial easing from the stricter provisioning rules proposed in May 2023.

Key Highlights of RBI’s Final Guidelines

• Lower General Provisioning During Construction Phase
  • All projects (excluding CRE): 1% of funded outstanding
  • Commercial Real Estate (CRE): 1.25%
  • CRE – Residential Housing (CRERH): 1.0%
  • (This is significantly lower than the 5% proposed in the earlier draft.)
• Provisioning During Operational Phase (Post Repayment Start)
  • CRE: 1.0%
  • CRERH: 0.75%
  • Other Projects: 0.4% (same as current levels)
• Incentivised Provisioning Reduction Criteria (Earlier Draft)
  • The May 2023 draft allowed a phased reduction in provisioning from 5% to 2.5%, and eventually to 1%, subject to:
    • Positive net operating cash flow (NOCF) covering current repayment obligations, and
    • A minimum 20% reduction in total long-term debt post commencement of commercial operations.
  • These conditions have now been relaxed, and the final norms directly mandate lower provisioning across stages, simplifying compliance.

Impact

• Relief to Lenders: Banks and financial institutions will now set aside less capital for provisioning against standard project loans, especially during the high-risk construction phase.
• Support for Infrastructure Financing: By easing the provisioning burden, RBI aims to revive lending appetite in sectors such as infrastructure, manufacturing, and residential real estate.
• Balanced Prudence: While CRE projects still attract a higher provisioning rate (1.25%), the reduction from the proposed 5% ensures continued prudence without stifling credit flow.

BS