RBI Introduces New Harmonised Framework for Project Finance: Key Highlights of the Reserve Bank of India (Project Finance) Directions, 2025

Introduction

The Reserve Bank of India (RBI) has issued the Reserve Bank of India (Project Finance) Directions, 2025 (“New Directions”), which are set to come into force from October 01, 2025. These directions aim to establish a harmonised and principle-based framework for financing both infrastructure and non-infrastructure projects, including Commercial Real Estate (“CRE”) and Commercial Real Estate-Residential Housing (“CRE-RH”), by Regulated Entities (“REs”).

Applicability

These directions apply to project finance exposures of all Commercial Banks (including Small Finance Banks but excluding Payments Banks, Local Area Banks, and Regional Rural Banks), all Non-Banking Financial Companies (NBFCs) (including Housing Finance Companies), all Primary (Urban) Cooperative Banks, and All India Financial Institutions (AIFIs).

However, the existing Prudential Framework for Resolution of Stressed Assets, issued on June 7, 2019, will continue to guide early recognition and resolution of stress, with the New Directions specifically addressing project finance exposures previously excluded. For project finance accounts, a 'credit event' will trigger a collective resolution process in terms of the Prudential Framework.

Key aspects of the New Directions include

1. Streamlined DCCO Extensions, Flexibility, and Cost Overrun Funding and Change in Scope and Size

   Permitted extensions for the Date of Commencement of Commercial Operations (“DCCO”) have been rationalised. The new limits allow for an extension of up to three years for infrastructure projects and up to two years for non-infrastructure projects (including CRE and CRE-RH) from the original DCCO.

   
   

   REs has been granted flexibility in extending the DCCO within the prescribed ceilings, based on their commercial assessments. A lender may finance cost overruns associated with permitted DCCO deferment and classify the account as 'Standard', provided the cost overrun is up to a maximum of 10% of the original project cost (in addition to Interest During Construction - IDC). This funding should ideally be from a Standby Credit Facility (“SBCF”) sanctioned at the time of financial closure. For infrastructure projects where SBCF was not pre-sanctioned or continuously renewed, additional funding for cost overruns will be priced at a premium.

   
   

   A project finance account where DCCO extension is necessitated by an increase in the project outlay due to an increase in scope and size (25% or more of the original outlay) may be classified as 'Standard'. This is subject to the lender reassessing project viability and, if already rated, the new external credit rating not being more than one notch below the previous one. If unrated, it shall achieve an investment grade external rating for projects with aggregate exposure of INR 100 crore or more. This benefit is available only once during the project's lifetime.

   
   

2. Revised Standard Asset Provisioning

   For project finance exposures, a lender shall maintain a general provision on a portfolio basis at specific rates during the construction phase: 1.25% for CRE, 1.00% for CRE-RH, and 1.00% for all other projects.

   
   

   For accounts that have availed DCCO deferment and are classified as 'standard', additional specific provisions of 0.375% for infrastructure projects and 0.5625% for non-infrastructure projects (including CRE and CRE-RH) will be maintained for each quarter of deferment, over and above the general standard asset provision. These additional provisions will be reversed upon commencement of commercial operation.

   
   

   During the operational phase (after commencement of repayment of interest and principal), the standard asset provisioning requirement will be reduced to 1.00% for CRE, 0.75% for CRE-RH, and 0.40% for other project exposures.

   
   

   For existing projects where financial closure was achieved as of the effective date (October 01, 2025), the previous prudential guidelines on provisioning will continue to apply. However, any resolution of a fresh credit event and/or change in material terms and conditions in the loan contract after the effective date will be subject to the new provisioning stipulated in these New Directions.

   
   

3. Disbursement and Monitoring 

   Lenders shall ensure sufficient land/right of way is available before disbursement of funds, with minimum requirements of 50% for infrastructure Public Private Partnership (“PPP”) projects and 75% for other projects. For infrastructure projects under the PPP model, disbursement begins after the 'Appointed Date' is declared. Disbursements shall be proportionate to project completion stages and equity infusion.

   
   

4. Database and Disclosures

   Lenders are required to create and maintain a project-specific database in an electronic and easily accessible format, updating changes within 15 days. Appropriate disclosures related to implemented resolution plans shall be made in their financial statements under 'Notes to Accounts'.

   
   

Conclusion

The New Directions mark a significant shift in the RBI’s regulatory approach to project finance, laying down a more standardised and risk-sensitive framework that reflects the evolving complexities of infrastructure and real estate development. By streamlining provisions for DCCO extensions, provisioning norms, cost overrun funding, and project monitoring, the RBI seeks to enable greater credit discipline, enhance lender accountability, and improve long-term viability of project assets.

Disclaimer

The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.

For further queries or details, you may contact:

Mr Anuroop Omkar

Partner, AK & Partners

info@akandpartners.in