RBI Finalises New Project Finance Norms, Eases Capital Burden on Lender

The Reserve Bank of India (RBI) has unveiled its finalised guidelines on project financing, introducing a streamlined and less capital-intensive framework for banks and financial institutions. Set to take effect from October 1, 2025, the revised norms aim to boost infrastructure and real estate lending while maintaining regulatory discipline.

One of the most significant changes is the reduction in provisioning requirements during the construction phase. Instead of the previously proposed 5% standard provisioning, lenders will now need to maintain just 1% for general infrastructure project loans under construction. For commercial real estate (CRE) projects, provisioning is set at 1.25%, while CRE-residential housing loans will also see relaxed provisioning norms.

Once the project becomes operational, the provisioning levels further reduce to 0.4% for infrastructure projects, 1% for CRE, and 0.75% for residential housing within the CRE segment. Projects achieving financial closure before October 1 will continue under the earlier rules, offering continuity for existing borrowers.

To manage risk, the RBI has introduced a principle-based stress resolution mechanism. If a project’s commercial operations are delayed by more than three years for infrastructure or two years for non-infrastructure, lenders must formulate a resolution plan and make quarterly provisions. However, cumulative provisioning in such cases remains below levels initially proposed in 2024.

Analysts from ICRA and Motilal Oswal have welcomed the changes, calling them well-balanced. They believe the reduced capital requirements won’t significantly impact banks’ profitability, as lenders can adjust interest rates to manage risk.

The announcement has already sparked a positive market reaction, particularly among PSU lenders like REC and PFC, whose stocks gained on the news. Overall, the RBI’s updated norms aim to encourage long-term lending while maintaining robust oversight.