RBI Issues Project Finance Directions, 2025

In a landmark regulatory move, the Reserve Bank of India (RBI) has notified the Project Finance Directions, 2025, via Circular bearing reference no. RBI/2025-26/ 59 DOR. STR. REC. 34/21.04.048/ 2025-26 dated June 19, 2025, ushering in a harmonized framework for project financing across infrastructure and non-infrastructure sectors.

Set to come into effect from October 1, 2025, these directions apply to all Commercial Banks (excluding Payments/RRBs), NBFCs, Housing Finance Companies, Primary Urban Cooperative Banks, and All India Financial Institutions. The reform aims to balance financial discipline with flexibility, improve risk management, and enhance credit quality in India’s expanding project finance ecosystem.

The new directions aim to strengthen credit discipline, enhance risk-based underwriting, and bring project loans squarely within the RBI’s Prudential Framework for Resolution of Stressed Assets, 2019, while offering lenders more operational clarity and capital relief.

It covers all project finance exposures where at least 51% of debt servicing arises from project cash flows and where all lenders are signatories to a common loan agreement. Projects achieving financial closure prior to October 1, 2025, will continue under existing norms, unless a fresh credit event or material contractual modification occurs thereafter.

The directions introduce a phase-wise approach dividing the project lifecycle into

1. Design
2. Construction
3. Operational phases

The directions emphasize milestone-based disbursement and repayment aligned to project progress, with repayment tenures capped at 85% of the project’s economic life. This lifecycle-based framework allows for more accurate risk pricing and progress-linked credit structuring.

A pivotal shift is the replacement of a binary ‘default’ approach with a more nuanced ‘credit event’ trigger during the construction phase, enabling early detection of distress. All credit events must be reported to CRILC (Central Repository of Information on Large Credit) on a weekly and monthly basis. Lenders must initiate resolution under the Prudential Framework within 30 days of such an event.

Key Sanction & Disbursement Norms:

• 90% financial closure is mandatory prior to first disbursement.
• Repayment tenor, including moratorium, shall not exceed 85% of the project’s economic life.
• Minimum exposure thresholds during construction:
  • For exposure ≤ ₹1,500 crore, each lender must hold ≥ 10% of total debt.
  • For exposure > ₹1,500 crore, each lender must hold Rs. 150 crore or 5%, whichever is higher.
• Land/ROW readiness:
  • 50% for PPP infrastructure;
  • 75% for non-PPP infrastructure and non-infra;
  • Lender discretion for transmission lines.
• Disbursements shall be made in phases, contingent upon certification of project progress by an independent engineer or architect and aligned with the corresponding infusion of equity by the promoter.

For PPP projects, fund-based disbursement is prohibited prior to the declaration of the appointed date, although non-fund facilities may be issued. DCCO (Date of Commencement of Commercial Operations) may be revised in line with changes to the appointed date, subject to revalidation of project viability and lender approvals. A techno-economic viability (TEV) study is required where aggregate exposure exceeds ₹100 crore.

Permissible DCCO Extensions Without Downgrade:

1. Up to 3 years for infrastructure projects.
2. Up to 2 years for non-infrastructure projects (including CRE and CRE-RH).
3. Cost overruns up to 10% of the original project cost (excluding IDC) are allowed without asset downgrade if financial metrics remain stable or improve.
4. For scope/size expansions, an increase of 25% or more in project cost can still retain standard asset classification, subject to compliance.
5. In cases of continued project delays, additional provisioning will be required at the following rates:
   • 0.375% per quarter for infrastructure projects.
   • 0.5625% per quarter for non-infrastructure projects, including Commercial Real Estate (CRE) and CRE–Residential Housing (CRE–RH), reflecting a substantial easing compared to the earlier draft guidelines on Draft Prudential Framework for Income Recognition, Asset Classification and Provisioning Pertaining to Advances—Projects under Implementation, Directions, 2024, dated May 03, 2024, which had suggested provisioning of up to 2.5%.

Data Governance and Compliance:

To ensure robust oversight, lenders must:

• Maintain digital databases of all project finance exposures.
• Update them within 15 days of any material change.
• Implement such systems within 3 months from the effective date.
• Ensure independent validation of project progress by certified engineers or architects.

The RBI (Project Finance) Directions, 2025, mark a significant evolution in India’s credit and regulatory landscape. By introducing a common architecture for project finance, the Directions are expected to:

• Reduce delays in project implementation.
• Foster early stress recognition.
• Increase accountability in underwriting, and
• Enhance investor and lender confidence in long-gestation infrastructure projects.

As project finance becomes increasingly vital for India’s infrastructure growth, these directions reflect the RBI’s intent to transition from a fragmented, product-based lending model to a unified, risk-calibrated system for project finance. They integrate lender discipline with flexibility, reduce capital burdens for compliant lenders, and introduce early warning-based stress intervention, a move likely to mitigate large-scale defaults during project construction phases.