Navigating The New Paradigm Insights Into RBI’s Project Finance Directions, 2025
The Directions are set to fundamentally reshape project finance in India, impacting regulated entities, developers, investors, and the broader financial sector
Project financing in India has been significantly reformed with the Reserve Bank of India (Project Finance) Directions, 2025 (“Directions”), effective from October 1, 2025 (“Effective Date”). Issued to create a transparent and robust framework for financing large infrastructure and non-infrastructure projects (including commercial real estate), these guidelines address longstanding issues like project delays and cost overruns that have led to rising (non-performing assets) NPAs.
The Directions cover comprehensively project finance exposures of all commercial banks (except payments banks, local area banks, and regional rural banks), all NBFCs (including housing finance companies), all primary (urban) cooperative banks, and all India Financial Institutions (“REs”).
The Directions exclude projects with financial closure before the Effective Date, which will remain governed by previous guidelines. However, if a new credit event or material change occurs after the Effective Date, the Directions will apply. Stress resolution for loans not qualifying as project finance or for already operational projects will continue under the existing prudential framework.
The Directions create a stringent framework of prudential requirements with increased upfront compliance requirements and more intensive monitoring for the entire life of the project.
Prudential Conditions Related to Sanction
The Directions introduce strict prudential requirements and heightened monitoring throughout a project’s lifecycle. At the sanction stage, REs inter-alia must ensure:
- Financial closure and date of commencement of commercial operations (“DCCO”) documentation are in place before disbursing funds, with financial closure defined as at least 90% of the project cost being legally committed.
- Repayment schedules are aligned with project cash flows, capped at 85% of the project’s economic life.
- Multiple lending exposure floors require each lender to maintain a minimum share (10% for exposures up to INR 1,500 crores; 5% or INR 150 crores, whichever is higher, for larger projects), ensuring accountability among participating lenders.
- Upfront clearances must be obtained before financial closure, except for milestone-based approvals, reducing risks of delays due to pending permits.
Prudential Conditions Related to Disbursement and Monitoring
The Directions demand strict compliance with physical progress and key project milestones before the release of funds such as acquisition of minimum required land or right of way to be secured prior to the disbursement which has been stipulated to be at least 50% for PPP infrastructure projects and 75% for all other projects. Further, fund-based facilities for PPP infrastructure projects can only be released after the appointed date (or equivalent) is declared. If the appointed date shifts, the DCCO can be adjusted accordingly, with a re-evaluation of project viability and a Techno-Economic Viability study for exposures of INR 100 crore or more.
Disbursements must be linked to project completion stages and progress in equity or other funding sources. Further, certification of project milestones by an Independent Engineer or Architect is mandatory, ensuring prudent fund use and reducing information gaps for lenders.
Prudential Norms for Resolution and DCCO Extensions
The Directions introduce a proactive and integrated approach to resolution of stress, specifically regarding DCCO extensions, a typical issue in project finance. The definition of a ‘Credit Event’ has been significantly expanded to include not just payment defaults, but also events such as DCCO expiry or extension requests, the need for additional debt, or signs of financial distress under the existing prudential framework. This shift mandates early, collective lender intervention. Upon occurrence of such an event during construction, the REs must report it to the Central Repository of Information on Large Credit, notify other financial institutions, conduct a 30-day preliminary review, and—if needed—pursue a resolution plan under an inter creditor agreement in line with the existing prudential framework.
Conditions for Standard Asset Classification with DCCO Extension
According to the Directions, REs have the flexibility to extend DCCO and retain the account rating as ‘Standard’, subject to the condition that the resolution plan meets specified requirements:
- Permissible DCCO Deferment:
a) Up to 3 years for infrastructure projects
b) Up to 2 years for non-infrastructure projects (including CRE and CRE-RH)
c) Extensions beyond these limits disqualify the account from standard classification.
- Cost Overrun Funding:
a) Lenders may fund cost overruns up to 10% of the original project cost (excluding interest during construction), ideally through a pre-sanctioned Standby Credit Facility (SBCF).
b) If no SBCF was sanctioned, additional funding must carry a risk premium
- Change in Scope and Size:
a) Lenders may fund cost overruns up to 10% of the original project cost (excluding interest during construction), ideally through a pre-sanctioned Standby Credit Facility (SBCF).
b) If no SBCF was sanctioned, additional funding must carry a risk premium
- Timelines:
a) The resolution plan must be implemented within 180 days from the end of the review period.
b) Failure to comply results in immediate downgrade to NPA
Enhanced Data Management and Disclosures
REs must maintain and regularly update electronic project databases, with any changes updated within 15 days and must also disclose implemented resolution plans in financial statements to promote transparency.
Conclusion
The Directions are set to fundamentally reshape project finance in India, impacting regulated entities, developers, investors, and the broader financial sector. For REs, the Directions introduce a more formalized and vigilant approach, requiring greater upfront compliance and robust documentation, but also easing capital requirements through streamlined provisioning norms and offering clarity and flexibility in asset classification, especially regarding DCCO extensions. Developers and investors face higher initial compliance costs and stricter implementation controls, but benefit from a more predictable and transparent regulatory framework that enhances project viability and investment confidence. Sector-wide, the Directions have been positively received by the market, reflecting the value of regulatory clarity and the potential for accelerated infrastructure financing. By promoting responsible lending, containing systemic risk, improving asset quality, and mandating enhanced data management and disclosure, the Directions align with the RBI’s goals of fostering a healthy, stable, and transparent financial system.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.