RBI’s Project Finance Directions 2025 – ‘Reins in Check’ with reasonable flexibility

Background

In its Statement on Developmental and Regulatory Policy Measures issued in October 2023, the RBI recognised the importance of having a strong regulatory framework to govern the Indian project finance landscape, especially with respect to income recognition, asset classification and provisioning requirements for projects under implementation. RBI indicated that extant prudential norms would soon be replaced by a comprehensive framework applicable to all regulated entities to harmonize the Indian regulatory landscape for project financing to projects under implementation.

Soon after, the RBI released the ‘Reserve Bank of India – Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances – Projects Under Implementation, Directions, 2024’ (“Draft Framework”), inviting comments and suggestions from industry stakeholders, experts, academicians, legal experts and the general public.

The Draft Framework proposed to rehaul the existing ‘Prudential Framework for Resolution of Stressed Assets’ issued on June 7, 2019 (“Prudential Framework”) which excluded guidance on restructuring of borrower accounts pertaining to projects under implementation involving a change in date of commencement of commercial operations (“DCCO”).

Thus, the RBI (Project Finance) Directions, 2025 were issued vide circular no. RBI/2025-26/59 on June 19, 2025 (“2025 Directions”) taking into account the  feedback on the Draft Framework.

Given below is a synopsis of lenders’ responsibilities in relation to, amongst other things, provisioning, resolution and monitoring, in respect of project finance accounts.  

1. Applicability and Effectiveness

The 2025 Directions shall be effective from October 01, 2025 and are applicable to the following sectors, where projects[1] are yet to achieve financial closure:

1. infrastructure sector; and
2. non-infrastructure (including commercial real estate (“CRE”) and CRE-residential housing (“CRE-RH”)) sectors.

The following lenders regulated by RBI (“REs”) come under the purview of the 2025 Directions:

1. commercial banks;
2. non-banking financial companies;
3. primary (urban) cooperative banks; and
4. all India Financial Institutions.

1. Exposures qualified as ‘project finance’

RE’s exposure would qualify as ‘project finance’ only if the following conditions are satisfied:

1. predominant source of repayment (minimum 51%) as envisaged at the time of financial closure must be from cashflows of the project being financed; and
2. all lenders must have a common loan agreement (which may have different loan terms for each lender but should have the same DCCO) agreed between the lenders and the borrower.

• Project Phases

RBI has categorized projects into the following 3 (three) phases:

1. Design phase – designing, planning, obtaining all applicable clearances/approvals till financial closure;
2. Construction phase – after financial closure up to and the day prior to actual DCCO; and
3. Operational phase – from the actual DCCO up to the day of repayment of the project finance exposure.

1. Sanction, Disbursement, Monitoring – some critical obligations of lenders

1. Resolution
2. Stress-related accounts

• lenders to monitor project performance and stress build-up regularly;
• resolution plan to be initiated as soon as any signs of stress build-up;
• occurrence of a ‘credit event’ with any lender, to trigger collective resolution under the Prudential Framework;
• credit events to be reported to the Central Repository of Information on Large Credit (CRILC) as well as other lenders in the consortium/multiple lending arrangement, by the relevant lender[2]; and
• lenders to review the debtor account within 30 (thirty) days from the date of such credit event.

2. Extension of original / extended DCCO

• accounts satisfying conditions specified in Chapter III of the 2025 Directions, may continue to be classified as ‘Standard’, if the resolution plan is implemented, subject to fulfilment of the following conditions:
  • the DCCO deferment and consequential shift in repayment schedule should be of the same or shorter duration and within the limits specified in the 2025 Directions[3];
  • financing of any cost overrun should not exceed 10% of the original project cost (excluding interest during construction);
  • any financing through standby credit facility should be specified upfront or approved at the time of financial closure and premium should also be specified in the documentation; and
  • financial parameters should remain unchanged for the lenders.

3. Change in scope and size of project due to extended DCCO

• accounts can still be categorised as ‘Standard’, subject to compliance with certain conditions including:
  • increase in project cost (excluding cost-overrun in respect of the original project) is 25% or more;
  • lender re-assesses the project viability;
  • revised credit rating not below previous rating, by more than 1 (one) notch;
  • for unrated debt, it should be at least investment grade if aggregate lender exposure exceeds INR 100 crores.

Re-classification under this head is permitted only once in the lifetime of the project.

If the resolution plans are not implemented successfully, the accounts need to immediately be downgraded to NPA status. Upgradation of NPA accounts is permitted only upon successful implementation of the resolution plan / performance post DCCO.

1. Provisioning

• Miscellaneous

1. The Prudential Framework will continue to apply where the loan does not qualify as ‘project finance’ or where the project is in the operational phase.

2. ‘Credit event’ has been defined in the 2025 Directions to mean any of the following:

• default with any lender;
• need for extension of the original/extended DCCO or expiry of original/extended DCCO;
• need for infusion of additional debt;
• the project is faced with financial difficulty as determined under the Prudential Framework.

3. Maintenance of database and disclosures

• Lenders are required to maintain and update project specific data, in electronic format on an ongoing basis.
• Lenders need to disclose resolutions plans implemented by them, in their financial statements.

4. The 2025 Directions also stipulate penal consequences for lenders including supervisory and enforcement action, against non-compliance entities.

Conclusion

The 2025 Directions place considerable onus on REs with respect to monitoring stress, provisioning, disclosures, ensuring satisfaction of conditions prior to sanctioning and disbursement, etc. However, early identification of stress, guidance on asset classification in various scenarios (without downgrading the asset), satisfaction of essential conditions prior to loan sanctioning (including ensuring availability of project land), etc., are key to reducing the risk of project delays, losses to REs (due to delayed DCCO and cash flows) and resultant NPAs.

RBI has kept the ‘Reins in Check’ to ensure discipline and a healthy regulated financing market, by delegating several responsibilities to REs. However, RBI’s plan is clear – to ease the project financing exercise for both REs and borrowers by providing a robust framework and clarity on critical aspects of the project cycle. All in all, the 2025 Directions will hopefully catapult project financing and help to accelerate growth in the infrastructure and non-infrastructure (including CRE) sectors, a key agenda for the GoI.

[1] The term ‘Project’ has been specifically defined in the 2025 Directions as any “ventures undertaken through capital expenditure (involving current and future outlay of funds) for creation/expansion/upgradation of tangible assets and/or facilities in the expectation of stream of cash flow benefits extending far into the future.”

[2] Instructions in this regard to be issued in due course.

[3] Permitted deferment of DCCO is up to 3 years for Infrastructure projects and up to 2 years for non-infrastructure projects