On June 19, 2025, the Reserve Bank of India (RBI) issued the Reserve Bank of India (Project Finance) Directions, 2025 (the “Directions”). These Directions aim to standardize and strengthen the framework governing project financing across all regulated financial entities.

Scope and Applicability 

The Directions apply to all commercial banks (excluding payment banks, local area banks, and regional rural banks), non-banking financial companies (including housing finance companies), primary (urban) cooperative banks, and All India Financial Institutions.

Projects achieving financial closure before October 1, 2025, will continue to be governed by the existing guidelines unless there is a fresh credit event or material change in terms and conditions of the loan agreement of such project. For resolution of stress in loans, projects not classified as ‘project finance’ under the Directions or those already operational will continue to be governed by the existing Prudential Framework for Resolution of Stressed Assets dated June 7, 2019 (“Prudential Framework”) or the relevant lender-specific regulations.

Project Phases and Conditions

Project Phases

Projects are categorized into 3 (three) phases:

1. Design Phase: From inception to financial closure.

2. Construction Phase: From financial closure to the day before the actual date of commencement of commercial operations (DCCO).

3. Operational Phase: From actual DCCO until full repayment of the project finance exposure.

Conditions for Sanction, Disbursement, and Monitoring 

Lenders must ensure the following:

1. Financial closure is achieved, original DCCO and disbursement schedules are documented before any disbursement. Repayment schedules must not exceed 85% (eighty five percent) of the project's economic life.

2. All critical approvals (except those milestone-dependent) are secured before financial closure.

3. Minimum individual lender exposure for under-construction projects: 10% (ten percent) for total exposures up to Rs. 15,000,000,000 (Rupees fifteen thousand million), and the higher of 5% (five percent) or Rs. 1,500,000,000 (Rupees one thousand five hundred million) for exposures above Rs. 15,000,000,000 (Rupees fifteen thousand million).

4. Land/ right-of-way requirements should be met (50% % (fifty percent) for Public Private Partnership (PPP) projects; 75% (seventy five percent) for others (except transmission line projects which are dependent on lender’s discretion) before disbursement.

5. For infrastructure PPP projects, disbursement should start only after the appointed date or upon declaration of its equivalent, subject to reassessment and techno-economic viability study where total exposure is Rs. 1,000,000,000 (Rupees one thousand million) or more.

These measures reflect the RBI’s objective to enforce strict compliance among lenders. Adhering to these mandated conditions is essential to strengthen project viability and mitigate financing risks.

Resolution of Stress, Extension of DCCO and Cost Overruns

Stress Resolution:

1. Lenders must actively monitor projects and promptly initiate resolution plans upon identifying stress.

2. Any reference to default is now linked to “credit event”, the definition of which has been broadened, triggering early collective resolution.

3. Following a credit event, lenders must: 

• report to the Central Repository of Information on Large Credits (CRILC);
• notify consortium members;
• conduct a debtor account review within 30 (thirty) days (“Review Period”); and
• act per the Prudential Framework thereafter.

DCCO Extensions and Cost Overruns:

1. Projects remain ‘standard’ if DCCO extensions within the resolution plan are within permissible limits (3 (three) years for infrastructure projects; 2 (two) years for non-infrastructure projects).

2. Cost overruns up to 10% (ten percent) due to DCCO extensions as stated above may be funded by lenders through pre-approved Standby Credit Facilities (SBCF) which should have been sanctioned by the lender(s) at the time of financial closure.

3. For infrastructure projects where SBCF was neither sanctioned at financial closure nor subsequently renewed, any additional funding shall carry a premium above the rate that would have applied had the SBCF been pre-sanctioned. Lenders should ensure that loan agreements from inception expressly stipulate this additional risk premium, with a provision to increase it based on the actual risk assessment at the time of sanction.

4. Projects will remain ‘standard’ if increase in project cost due to change in scope is at least 25% (twenty five percent), project’s viability is reassessed and an updated credit rating which is not more than one notch below is obtained.

5. The Directions mandate that regulated entities must, within 180 (one hundred and eighty) days from the end of the Review Period, execute all requisite agreements, create necessary security, record the revised capital structure in the books of the lender, and ensure the implementation of the resolution plan. Any failure to meet these timelines will result in the borrower’s account being classified as a Non-Performing Asset (NPA).

Provisioning

Lenders must maintain general provisions as follows:

Additional provisions are required for DCCO-deferred assets: 0.375% (zero point three seven five percent) for infrastructure, 0.5625% (zero point five six two five percent) for non-infrastructure for each quarter of such deferment, reversible upon project commencement.

Other Key Terms

1. Lenders must maintain up-to-date electronic records of project specific data, reflecting changes within 15 (fifteen) days.

2. Implementation of resolution plans should be disclosed by the lenders in their financial statements.

3. Non-compliance will trigger regulatory action.

4. Existing actions under repealed guidelines remain valid unless inconsistent with the Directions.

Author’s view

These Directions introduce stricter accountability but significantly reduce the provisioning burden from the earlier draft norms. By adopting risk-based provisioning and clearer resolution frameworks, RBI aims for greater transparency and stability in project financing, ultimately benefiting lenders, borrowers, and the broader economy.

The Directions will be effective from October 1, 2025 and can be accessed here.

This update has been contributed by Aseem Dhawan (Partner) and Apoorva Soni (Associate).

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