Introduction
The Reserve Bank of India (“RBI”) has published comprehensive directions for financing of projects in infrastructure and non-infrastructure (including commercial real estate and commercial real estate-residential housing) sectors (collectively, “Projects”) by regulated entities such as Commercial Banks, NBFCs (including HFCs), Primary (Urban) Cooperative Banks, and All India Financial Institutions (collectively, “REs” and individually, “RE”).
These directives, issued pursuant to RBI’s notification namely ‘The Reserve Bank of India (Project Finance) Directions, 2025’ dated 19th June 2025 (“RBI Directions”), shall come into effect from 1st October 2025 (“Effective Date”), giving REs sufficient time to realign their internal policies and systems.
The RBI Directions focus on providing a prescriptive framework pertaining to financing of Projects and standardizing practices across REs. However, they shall not apply to Projects where financial closure has been achieved as on the Effective Date.
Phases of Projects
The Projects have been divided into 3 (three) phases, namely: (a) Design Phase - which involves designing, planning and obtaining applicable clearances / approvals till financial closure; (b) Construction Phase - which begins upon the financial closure and ends on the day prior to the actual date of commencement of commercial operations (“DCCO”); and (c) Operational Phase - which initiates on the actual DCCO and ends with full repayment of the project finance exposure.
Prudential Conditions Related to Sanction
The REs shall be required to ensure that the original DCCO and disbursement schedule are clearly mentioned in the relevant loan agreement. Further, the repayment schedule shall be designed by REs taking into account the initial cash flows, provided that the tenor of repayment shall not exceed 85% of the economic life of the relevant Project.
In consortium financing for under-construction Projects: (a) where aggregate exposure by participant REs is up to INR 15,000,000,000/-, no individual RE shall have an exposure less than 10% of such aggregate exposure; and (b) where aggregate exposure by participant REs is above INR 15,000,000,000/-, the exposure floor for each RE shall be 5% or INR 1500,000,000/-, whichever is higher.
Post actual DCCO, the aforesaid threshold requirements shall not be applicable. In addition, the REs shall be freely permitted to transfer their credit exposure, provided the aforesaid thresholds are maintained.
Further, the REs shall ensure applicable clearances are obtained by the debtors prior to financial closure, except those contingent on project milestones.
Prudential Conditions Related to Disbursement and Monitoring
The REs must ensure that the minimum land acquisition or right of way (“RoW”) requirements are met prior to disbursing funds for any Project. Specifically, for infrastructure projects under the Public-Private Partnership (“PPP”) model, at least 50% of the required land or RoW must be in place. For all other Projects, a higher threshold of 75% has been stipulated.
Fund-based facilities shall be disbursed by REs only after the declaration of the appointed date or its equivalent, in the case of infrastructure projects under the PPP model. However, non-fund-based facilities such as performance guarantees or letters of credit may be provided by the REs prior to the appointed date, if so directed by the concessioning authority.
Further, disbursement of funds must be carried out in proportion to the stages of Project completion and the progress in equity infusion / other agreed sources of funding, as defined under the financial closure terms. This approach ensures discipline in fund utilization and accountability throughout the Project development cycle.
Prudential Norms for Resolution
In the event of any early signs of financial stress for a Project, the REs shall proactively initiate a resolution plan to address potential risks.
Upon the occurrence of a ‘credit event’ with any RE during the construction phase of a Project:
- a collective resolution in terms of The Prudential Framework for Resolution of Stressed Assets issued on June 7, 2019, as updated from time to time (“Prudential Framework”), shall be triggered;
- the REs shall report such ‘credit event’ to the Central Repository of Information on Large Credit (CRILC); and
- the REs shall notify all other participating financial institutions, as applicable, of the ‘credit event’ to ensure coordinated action.
Following the ‘credit event’, the RE shall, within 30 (thirty) days, conduct a preliminary review of the debtor account. If a resolution is deemed necessary, the RE shall enter into an Inter Creditor Agreement (ICA) with other REs and implement a resolution plan. This process must comply with the guidelines laid down under the Prudential Framework.
Extension of DCCO
Pursuant to the ‘Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ issued by RBI on 1st May 2025 (“IRAC Norms”), the lenders had been permitted to extend DCCO (as had been spelt out at the time of financial closure) for infrastructure and non-infrastructure projects and permit consequential repayment schedule, while maintaining the account ‘standard’. However, the timelines as to the permissible DCCO extension had been kept varied and dependent upon the cause of such extension.
The draft guidelines issued by the RBI namely ‘Draft Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances - Projects Under Implementation, Directions, 2024’ on 3rd May 2024 (“Draft Guidelines”) proposed that the permissible time limits for DCCO extension should be varied and contingent upon whether such extension is due to exogenous reasons, endogenous reasons or litigation.
Under the RBI Directions, REs have been provided flexibility to extend DCCO by way of a resolution plan and maintain the account standard if, inter alia: (a) shift in DCCO is less than 3 (three) years for infrastructure projects, and 2 (two) years for non-infrastructure projects; and / or (b) cost overrun associated with DCCO extension is within 10% of the original project cost, in addition to IDC; and / or (c) extension is due to change in scope or size of the Project.
Provisioning for Standard Assets
The REs shall be required to maintain a general provision for the funded outstanding on a portfolio basis, as per the following:
- During construction phase of a Project - the standard asset provisioning requirement shall be 1%, which shall increase for each quarter of DCCO deferment gradually. The requirements for under construction commercial real estate (CRE) exposures shall however be at 1.25%; and
- During operational phase of a Project - the standard asset provisioning requirement shall stand reduced to 1% for CRE, 0.75% for CRE-residential housing and 0.40% for other project exposures, respectively.
Conclusion
The RBI has done away with the concept of linking the timelines for permissible DCCO extensions with the causes for such extensions, and has instead, provided for upper limits for permissible DCCO extensions, to maintain the classifications of the accounts as ‘standard’.
In view of the above, since RBI Directions have been issued specifically for events linked to project finance, it shall be interesting to see if the RBI Directions shall take precedence over the IRAC Norms. In any case, it is clear that the RBI Directions are significantly liberal in comparison to the Draft Guidelines in so far as the DCCO extension is concerned.
The RBI Directions are also a step in the right direction as regards ease of compliance for the stakeholders by:
- laying down specific delay categorisation for DCCO;
- linking obtainment of approvals/ clearances with relevant Project milestones;
- detailing that DCCO shall be uniform for all REs funding the Project;
- highlighting the minimum exposure the REs may have in a consortium funding for a Project;
- setting out that a borrower’s account shall remain ‘standard’ even in the case of cost overrun associated with permitted deferment of DCCO, on the compliance of specific conditions; and
- specifying as to when financial closure shall be deemed to be achieved, which is when 90% of the total project cost has been tied up, providing an achievable figure for the stakeholders.
Holistically, the RBI Directions are aimed at encouraging lending in key sectors by providing more lucidity on project financing norms.
Authors:
Ankit Sinha
Partner, Juris Corp
Pranav Rattan
Senior Associate, Juris Corp
Aditya Garg
Associate, Juris Corp
Disclaimer:
This article is intended for informational purposes only and does not constitute a legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial / quasi-judicial authorities may not take a position contrary to the views mentioned herein.