On June 19, 2025, the Reserve Bank of India (RBI) issued the Reserve Bank of India (Project Finance) Directions, 2025, with the objective of establishing a standardized and robust regulatory framework governing project financing across all regulated entities (REs). These Directions are designed to streamline project-based lending, enhance credit discipline, and ensure financial prudence while providing operational flexibility.
1. Definition of Project Finance
Under the revised framework, project finance is defined as a form of lending wherein:
- Project revenues constitute the primary source of loan repayment.
- The loan is primarily secured against the project’s assets and cash flows, rather than the borrower’s overall creditworthiness.
2. Key Provisions of the Directions
a. Principle-Based Stress Resolution Framework
The RBI has mandated a principle-based approach for managing stress in project finance exposures. This marks a departure from prescriptive norms and allows REs greater discretion in formulating internal policies for the timely identification, reporting, and resolution of stressed assets.
b. Flexibility in Extension of DCCO
The Directions offer enhanced flexibility in extending the Date of Commencement of Commercial Operations (DCCO). Extensions will not automatically result in asset classification downgrades, provided the following conditions are met:
- The delay is due to legitimate factors beyond the control of the borrower.
- The project’s viability remains intact.
- Interest servicing continues regularly during the extended period.
c. Rationalisation of Standard Asset Provisioning
The provisioning requirement for under-construction projects has been rationalised to 1%, replacing earlier, higher thresholds. This measure seeks to better align regulatory capital norms with actual credit risk while supporting long-gestation infrastructure and development projects.
d. Objectives and Expected Outcomes
The implementation of these Directions is expected to:
- Improve credit discipline and enable timely stress resolution.
- Provide regulatory clarity and consistency in long-term project financing.
- Encourage wider RE participation in infrastructure development.
- Balance operational flexibility with financial prudence.
REs are required to adopt these Directions in both letter and spirit and align their internal frameworks accordingly.
3. Phases of Project Development
For the application of prudential norms under these Directions, projects shall be classified into the following three phases:
- Design Phase: Begins with the conceptualization of the project and includes planning, designing, and securing necessary approvals up to financial closure.
- Construction Phase: Commences post-financial closure and concludes a day prior to actual DCCO.
- Operational Phase: Begins on the actual DCCO and continues until full repayment of the project finance exposure.
4. Prudential Norms for Sanctioning Project Finance
Lenders’ credit policies must incorporate provisions aligned with these Directions. Specifically:
- Financial closure must be achieved, and the original DCCO clearly documented before any disbursement.
- Loan agreements should include a disbursement schedule aligned with project milestones and a post-DCCO repayment schedule that accounts for initial cash flow constraints.
- The total loan tenor, including any moratorium period, must not exceed 85% of the project’s economic life.
- All lenders involved must recognize the same original/extended/actual DCCO.
- For under-construction projects:
- With aggregate exposure ≤ ₹1,500 crore: no lender’s exposure should be <10% of the total.
- With aggregate exposure > ₹1,500 crore: minimum individual exposure must be the higher of 5% or ₹150 crore.
These thresholds are waived post-DCCO, enabling free secondary market transfer of exposures, in compliance with the Master Direction on Transfer of Loan Exposures. Before DCCO, transfer under syndication is permissible, subject to the above limits.
Lenders must also ensure that all applicable statutory and regulatory clearances are obtained prior to financial closure. Clearances contingent upon specific milestones (e.g., operating a boiler post-construction) shall be considered applicable only at the relevant stage.
5. Prudential Norms for Disbursement and Monitoring
Lenders are required to verify the availability of land/right of way before disbursing funds, as per the following minimum thresholds:
- PPP infrastructure projects: 50%
- Other projects (including CRE/CRE-RH): 75%
- Transmission lines: At lender’s discretion
In PPP infrastructure projects, disbursement may commence only post-declaration of the Appointed Date. However, non-fund-based facilities required by the concessioning authority may be sanctioned prior.
If the Appointed Date is revised by the concessioning authority before disbursement, the DCCO may also be revised through a supplementary agreement, subject to re-assessment of viability and internal approvals. A Techno-Economic Viability (TEV) study is mandatory where aggregate lender exposure is ₹100 crore or more.
Disbursements must be linked to project progress and equity infusion. The Lenders’ Independent Engineer (LIE) or Architect must certify project milestones.
Accounts may be classified as NPA prior to actual DCCO based on recovery performance, in line with the Master Circular on Prudential Norms on Income Recognition, Asset Classification, and Provisioning (April 1, 2025) or relevant lender-specific regulations.
6. Resolution of Stressed Project Finance Exposures
Lenders must monitor project performance and proactively initiate resolution plans in anticipation of stress. During the construction phase, occurrence of a credit event with any lender shall trigger collective resolution as per the Prudential Framework. In this context, ‘default’ shall be construed as ‘credit event’ unless otherwise specified.
All credit events must be reported to:
- The Central Repository of Information on Large Credit (CRILC) – via weekly and CRILC-Main reports.
- All consortium or multiple lenders involved in the exposure.
Upon occurrence of a credit event, lenders must conduct a preliminary account review within 30 days (the Review Period). Actions during this period, including signing of Inter-Creditor Agreements (ICA) and formulation of resolution plans, shall follow the Prudential Framework unless specifically modified by these Directions.
Disclaimer:
This document is intended for informational purposes only and does not constitute legal, financial, or tax advice. While efforts have been made to ensure accuracy, the content is subject to change based on regulatory updates or judicial interpretations. Readers are advised to consult with qualified professionals before making decisions based on this information.
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