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.  

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:

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

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

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

Prior to loan sanction

·       achievement of financial closure and original DCCO documented;

·       post DCCO repayment schedule to consider initial project cash flows;

·       repayment tenor does not exceed 85% of economic life of project;

·       until project achieves actual DCCO, each individual lender should have not less than:

o   10% of aggregate exposure for loans up to INR 1500 crores; and

o   5% or INR 150 crores, whichever is higher, for aggregate exposure more than INR 1500 crores.

·       All approvals / clearances for constructing the project to be obtained, unless specific timelines provided under law.

Pre-disbursement conditions

·       loan agreement to specify disbursement schedule vis-à-vis project completion milestones;

·       minimum requirement for right of way/sufficient land is in place:

o   for infrastructure projects under public-private partnership (PPP) model – 50%;

o   for other projects (non-PPP infrastructure, and non-infrastructure including CRE and CRE-RH) – 75%; and

o   for transmission line projects – as decided by lender.

·       for infrastructure projects under PPP model, declaration of the appointed date necessary for fund-based credit facilities;

·       disbursal to be proportionate to project completion milestones (as certified by the LIE), infusion of equity and other finance.

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.

Asset Classification

Sector

Construction Phase

Operational Phase – after commencement of repayment of interest and principal

Standard

CRE

1.25%

1.00%

CRE-RH

1.00%

0.75%

All others

1.00%

0.40%

DCCO Deferred Standard Assets

Infrastructure

0.375% (quarterly in addition to standard provisioning)

to be reversed upon commencement of operations

Non-infrastructure

0.5625% (quarterly in addition to standard provisioning)

Existing Projects

As per Prudential Guidelines

NPAs

As per provisions of the Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated April 01, 2025

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