What Has the RBI Done?
- The RBI issued the final “Project Finance Directions 2025” on Thursday.
- These directions aim to institutionalise a structured framework for banks and financial institutions (Regulated Entities or REs) to manage project finance, especially in high-risk sectors.
Relevance : GS 3(Banaking )
Revised Provisioning Requirements
- REs must now maintain:
- 1.25% provision for under-construction commercial real estate (CRE) loans.
- 1% for under-construction infrastructure projects.
- These are lower than the draft norms, which proposed:
- 5% for under-construction projects,
- 2.5% during operational stage,
- 1% at cash-generating stage.
- The reduced provisioning makes lending to such projects less capital-intensive.
Operational Stage Relief
- Provisioning reduces further once the project enters the operational phase, thus:
- Encouraging completion and performance-based financial discipline.
- Reducing the capital burden on banks for viable, revenue-generating projects.
Stress Resolution Framework Introduced
- A principle-based regime is introduced to handle stress in project finance exposures.
- Seeks harmonisation across REs to ensure consistency and transparency in managing risks.
Rationalisation of DCCO Extensions
- RBI has rationalised the Date of Commencement of Commercial Operations (DCCO) extensions:
- Infrastructure projects: Max 3-year extension allowed.
- Non-infrastructure projects: Max 2-year extension allowed.
- Beyond these limits, projects may face asset classification downgrades.
Increased Flexibility to Lenders
- Despite setting overall ceilings, the RBI allows commercial discretion to REs in extending DCCO within these limits.
- Empowers lenders to make project-specific decisions while staying within risk parameters.
Why This Matters
- Brings regulatory clarity to long-gestation project lending.
- Aims to balance financial stability with credit flow to critical sectors like real estate and infrastructure.
- Supports growth-oriented, risk-sensitive financial planning by banks.
Implications
- Likely to spur greater bank lending to infrastructure and CRE sectors due to lower provisioning norms.
- Could improve project viability and reduce NPAs if implemented with proper risk assessments.
- Signals RBI’s shift to a more nuanced, risk-based regulation in long-term finance.
