RBI Introduces New Project Loan Regulations To Ease Banks, Borrowers

The Reserve Bank of India (RBI) has issued new guidelines for banks and financial institutions that give loans to projects under construction. Titled as the Reserve Bank of India (Project Finance) Directions, 2025, the rules will make project lending more transparent and uniform. The directions will be effective from October 1, 2025.

The final regulations come after a draft released in May 2024. Following responses from about 70 stakeholders such as banks, NBFCs, industry associations, law firms, and the government, the RBI has now issued the revised framework.

Extension of Delays Permitted Up to a Point

Financiers are now able to extend the date of the start of commercial operation, or DCCO (Date of Commencement of Commercial Operations), by 3 years for infrastructure projects and 2 years for non-infrastructure projects. They can do so on their own commercial judgment, as long as the extension does not exceed these boundaries.

The objective is to enable lenders to handle delays in mega-projects without invoking regulatory barriers. Concurrently, the RBI has provided the assurance that such extensions fall within a defined limit so that they do not get misused.

Lower Provisioning for Projects Under Construction

Provisioning rules have also been updated. Banks are required to keep aside 1 per cent of the loan value for projects under construction. For commercial real estate projects, the rate will be slightly higher at 1.25 per cent. These provisioning values will increase every quarter step-by-step if the starting date of the project is postponed.

If a project is already financially closed prior to the implementation of the new rules, it will continue to adhere to prevailing provisioning standards. This facilitates a smooth transition and prevents disruption in existing financing structures.

Provisioning Relaxed for Projects Under Operations

Once a project is in operation, provisioning needs will be low. For commercial property, it will be 1 per cent; for residential housing within commercial property, it will be 0.75 per cent; and for other project finance loans, it will be 0.40 per cent.

It is anticipated that this step will reduce the financial burden on lenders in the operational period and aid in the long-term viability of completed projects.

A Common Approach for All Lenders

One of the biggest advantages of the new change is the principle-based and simplified approach to project finances for all regulated entities like banks and NBFCs. This will ensure uniformity in the manner in which delays and stress in such loans are dealt with, irrespective of the lender.

By implementing these guidelines, the RBI is aiming to assist long-term projects while reducing risk for lenders. The balance between regulation and flexibility might make project financing more predictable and manageable for the financial sector.