RBI Eases Project Finance Norms, Slashes Provisioning Requirements

In a major relief to banks and financial institutions, the Reserve Bank of India (RBI) has eased final norms on provisioning for project finance loans. Under the revised guidelines, the provisioning requirement for under-construction project loans has been reduced to 1%, significantly lower than the 5% proposed in the draft norms issued in May 2024. These new norms will come into effect from October 1, 2025.

Why in News?

The RBI’s latest move reflects its consultative approach under Governor Sanjay Malhotra and aims to ease credit flow for infrastructure and commercial projects, which are critical to economic growth. The change is particularly significant given the high concerns voiced by banks over earlier, tighter draft regulations.

Key Provisions in the Final Norms:

• 1% Provisioning for under-construction project finance loans (down from proposed 5%).
• 1.25% Provisioning for under-construction commercial real estate (CRE) exposures.
• Provisions to increase quarterly in case of delay in project commencement.

Once operational

• 1% provisioning for CRE.
• 0.75% for CRE-Residential Housing (CRE-RH).
• 0.40% for other project exposures.

Applicability

• New norms apply prospectively from October 1, 2025.
• Ongoing projects will remain under the existing provisioning model to ensure implementation stability.

Objective and Impact

• Ensures better risk management without hampering credit flow to infrastructure and real estate sectors.
• Aims to support timely project execution and bank balance sheet health.
• Aligns with RBI’s broader accommodative policy direction under Governor Malhotra.

Expert Insight

• According to A.M. Karthik, Senior VP at ICRA “The final guidelines come as a relief for lenders. Operational projects remain at a 0.4% requirement, while under-construction provisioning at 1% is a marked improvement from the proposed 5%. The impact on NBFCs is also limited as they already follow expected credit loss models.”

Background

• RBI’s draft norms in May 2024 proposed tighter provisioning to enhance credit discipline.
• Financial institutions and industry bodies had flagged concerns about liquidity pressures and credit availability.
• The final version reflects a balanced approach, protecting both financial stability and growth requirements.