Infrastructure development is progressing rapidly in India, and it requires large-scale funding. Banks and Non-Banking Financial Companies (NBFCs) play a crucial role in this. However, due to stringent regulatory norms, these institutions have long faced challenges in project financing.
To ease these challenges, the RBI has taken a major step by announcing the latest project finance norms. Let’s break it down and understand whether it truly brings relief for banks and NBFCs.
What’s Happening?
The Reserve Bank of India issued new rules for project financing on June 19, bringing a sense of relief to banks and NBFCs. These rules will apply only to new project loans and will not affect existing ones. Earlier, in May 2024, the RBI had proposed a draft with strict regulations, but after receiving feedback from 70 entities — including banks, NBFCs, industry bodies, and the government — the final rules were made more lenient.
This decision comes as a major relief for the banking sector, as the May 2024 draft had proposed a 5% provisioning requirement during the operational phase. With this relaxation, the capital cost for banks will reduce, enabling them to finance more projects.
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RBI Eases Project Finance Provisioning Norms
According to the RBI’s guidelines, during the construction phase, banks now need to maintain provisioning of only 1.25% for Commercial Real Estate (CRE) and 1% for Commercial Real Estate-Residential Housing (CRE-RH) and other infrastructure projects. Furthermore, once the project becomes operational and loan repayment begins, the requirement reduces even further. At this stage, banks need to maintain provisioning of only 1% for CRE, 0.75% for CRE-RH, and 0.40% for all other projects.
These provisioning levels are significantly lower compared to the earlier draft guidelines. The draft had suggested a 5% provisioning requirement during the construction phase, which would reduce to 2.5% after project completion and to 1% once sufficient cash flow for loan repayment had begun.
RBI Simplifies DCCO Extension and NPA Rules
RBI has allowed banks to extend the Date of Commencement of Commercial Operations (DCCO) by up to three years for infrastructure projects and up to two years for non-infrastructure projects.
Additionally, under the guidelines, if the DCCO of a project is deferred but the project is still classified as a standard asset, banks will have to maintain additional provisioning of 0.375% per quarter for infrastructure loans and 0.5625% per quarter for non-infrastructure loans (including CRE and CRE-RH).
The RBI has also clarified that if a project classified as an NPA (Non-Performing Asset) is downgraded, it can only be upgraded after the actual DCCO, and only if the project performs well. The upgrade will be allowed only if the resolution plan is successfully implemented and no further DCCO extension is requested.
What’s in it for Investors?
Under the new rules, banks and NBFCs will need to set aside less money as provisioning. This will reduce financial pressure on NBFCs and give them greater flexibility to lend to large projects.
These changes also reduce the risk of sudden losses and enhance the perceived stability of banks and NBFCs, which, in turn, is likely to boost investor confidence. Positive commentary from analysts and brokerage firms further supports market sentiment, potentially lifting share prices and benefiting investors.
According to Business Today, analysts believe that the impact on the existing loan book is limited, but the relaxation in provisioning norms is a positive development. Additionally, Motilal Oswal Financial Services (MOFSL) has maintained a favourable outlook on the sector, even though the immediate impact on profitability and balance sheets is expected to be minimal.
What’s Next?
The RBI’s final project finance guidelines have provided significant policy clarity to India’s banking and NBFC sectors. These new rules will apply only to projects that achieve financial closure after October 1, 2025. Projects that have already achieved financial closure before this date will continue to be governed by the existing rules.
Overall, the revised norms by the RBI are expected to strengthen the NBFC sector and accelerate infrastructure development in India. At the same time, this move is likely to benefit financial institutions as well as the broader economy.
*The article is for information purposes only. This is not investment advice.
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