The Reserve Bank of India’s (RBI) final directions on project financing will help strengthen the guardrails against risk in project financing and harmonise the relevant and extant regulations across regulated entities. The final directions, released on June 19, 2025, come into effect from October 1, 2025. The increased provisioning requirements for project finance will also enhance the resilience of India's financial sector. Historically, the sector has grappled with substantial stress due to challenges in project execution, such as delays, cost overruns and regulatory hurdles. With provisioning levels rising moderately for under-construction projects, lenders will be better equipped to absorb potential losses.
These requirements will also promote more prudent lending practices, as lenders are incentivised to evaluate project viability and creditworthiness very carefully. Directions like ensuring availability of sufficient land/right of way under the prudential conditions related to disbursement and monitoring should ensure better lending practices by the lenders.
Notably, the incremental provisioning requirements are unlikely to pose a significant burden on lenders because their profitability and capitalisation levels are strong, which affords headroom to absorb the additional cost.
“Compared with the draft of May 2024, the final directions improve the ease in doing business for lenders. The provisioning requirements are significantly lower not only in the case of under-construction projects but also for operational projects. Additionally, the guidelines are applicable only on a prospective basis. As a result, the impact on credit costs would be well below what was envisaged earlier. The removal of the proposed six-month limit on moratorium period after DCCO will also benefit lenders, allowing them to continue to structure loans in line with the expected cash flows of projects,” says Subha Sri Narayanan, Director, Crisil Ratings.
Standard asset provisioning for operational projects remains in line with the extant guidelines for banks and upper-layer non-banking finance companies, ranging from 0.4 to 1.0% depending on the segment.
However, provisioning requirements across categories remain de-linked from the credit risk profile of individual projects, as indicated by the credit rating. This is unlike the extant capital requirements for bank lending to corporates, which are linked to the credit risk profiles of the latter. The proposed provisioning requirements also remain sector-agnostic, even as various sectors may carry diverse levels of risks, including different levels of ultimate loss-given defaults.
Says Sonica Gupta, Associate Director, Crisil Ratings, “There is unlikely to be a significant impact on lending rates and consequently, on the borrowing costs of under-construction projects. This is because the final directions are applicable only on a prospective basis, and hikes in the base provisioning requirement are relatively lower compared with what was envisaged in the draft guidelines. Of course, the step-up provisioning clause could result in higher risk premiums charged by lenders in sectors with a track record of significant DCCO extensions. These directions will also provide a growth fillip, with many lenders sitting on the fence thus far pending clarity on the final provisioning requirements and their applicability. All this should facilitate funding for the expected capital expenditure outlay of Rs 125-135 lakh crore over fiscals 2026-2030.”
