Financing for Projects and Infrastructure: RBI’s new Directions triggers big push for Infrastructure

Introduction

The Government of India in recent years has increased public spending on infrastructure capacity development, with India’s ambitious developmental targets in mind. Capital expenditure by the Government of India on major infrastructure sectors such as atomic energy, civil aviation, telecommunications, renewable energy, power, road, rural development, ports, housing, urban affairs and railways has therefore increased at a steady rate of 38.8 percent from 2020 to 2024[1]. However, India’s entire infrastructure capacity deficit cannot be met solely through public expenditure as it would lead to widening of the fiscal deficit which is presently in the range of 4.5-4.8 percent. Therefore, access to private investment and easy availability of debt and capital for financing of infrastructure and housing projects remain a critical need of the hour, to meet the Government’s vision of “Vikshit Bharat@2047”, and of India being a US$ 30 trillion economy and a developed country by 2047.

Sanction of long-term funding for large infrastructure and housing projects by banks and Non-Banking Financial Companies (NBFCs) has however gradually slowed down in recent years, due to a multitude of factors such as long gestation periods for projects, increase in levels of non-performing assets, frequency of asset-liability mismatch in projects, shortage of liquidity, insolvency risk in ring-fenced structures such as special purpose vehicles, difficulties in accurately assessing viability and cashflows of projects, especially in cases involving time and cost overruns caused by delays in obtaining of project-related licenses and regulatory approvals and land acquisition challenges etc. The role of Development Finance Institutions (DFIs) and All-India Financial Institutions (AIFIs) such as the National Bank for Financing Infrastructure and Development (NaBFID) formed in 2021 to address the burgeoning gap in financing long-term and large-scale projects has therefore assumed greater significance.

In this backdrop, the Reserve Bank of India (RBI) in May 2024 had issued its draft guidelines inviting comments from stakeholders seeking to rationalize norms applicable to regulated entities for project financing and providing a framework for restructuring of projects in the construction phase which are not yet operational. Basis inputs and feedback received from various market participants, the RBI has announced the Reserve Bank of India (Project Finance) Directions, 2025 on June 19, 2025 which are scheduled to come into effect from October 01, 2025 onwards, seeking to provide a harmonized framework for project financing by banks, NBFCs as well as AIFIs.

The authors in this article endeavour to analyse the new directions issued by the RBI, and its key takeaways and implications on project and infrastructure financing in India going forward.

Our analysis of RBI’s new directions on project financing

Applicability: The Reserve Bank of India (Project Finance) Directions, 2025 issued by RBI are applicable to project financing exposures of banks, NBFCs and AIFIs i.e., exposures where the primary security and more than 51% of debt servicing are to be met from the project revenues and cashflows generated and where lenders enter into a common lending agreement with the developer, which are either sanctioned post October 01, 2025 or which are faced with credit risk events including default post October 01, 2025. Since RBI’s directions do not specifically exclude debt instruments subscribed to by NBFCs and AIFIs for financing projects, such directions would also be applicable to such debt instruments.

These directions are applicable to both infrastructure projects as well as non-infrastructure projects including projects in the ‘Commercial Real Estate (CRE)’ and the ‘Commercial Real Estate – Residential Housing (CRE – RH)’ sectors. Projects for construction and development of income-producing real estate assets such as office/commercial buildings to let, retail, industrial and warehouse space, hotels etc. are generally classified as ‘Commercial Real Estate (CRE)’ projects while residential housing projects (which may include commercial end-use of up to 10% Floor Space Index (FSI)) are generally classified as ‘Commercial Real Estate – Residential Housing (CRE – RH)’ projects.

Minimum Exposure Requirements: For projects in the construction phase, each individual lender must have a minimum exposure of 10% of the aggregate exposure for the project (where the aggregate project exposure is up to INR 15 billion) or the higher of 5% of the aggregate exposure for the project or INR 1.5 billion (where the aggregate project exposure exceeds INR 15 billion). Such minimum threshold must be always complied with till the project becomes operational, even in case of transfer of loan exposures through direct assignment and securitization transactions by lenders.

Other Key Sanction and Disbursement Norms: Any sanction and disbursement of project finance by banks, NBFCs and AIFIs will be subject to the following key conditions precedent:

1. Licenses and regulatory approvals must have already been obtained by project developers (other than those approvals whose grant is contingent upon achievement of project milestones).
2. Arrangements for availability of land and right of way must already be tied up for a minimum threshold of at least 50% in case of Public Private Partnership (PPP) projects and for at least 75% for all other projects (other than transmission line projects, where the minimum threshold has been left to the discretion of lenders – since these projects are generally spread out across large tracts of land, and since land acquisition for setting up transmission line projects can be undertaken by distribution/transmission licensees through the Government under the Electricity Act, 2003).
3. For PPP infrastructure projects, the concession agreement with the concessioning/tendering authority should have already become effective.
4. Funding arrangements for at least 90% of the total project cost (including both debt and equity components) should have been tied up and become effective.
5. Scheduled/actual date from which project is operational i.e. the date of commencement of commercial operations (DCCO) should be aligned and consistent for all project lenders, and the repayment schedule for project loans should not be spread out beyond 85% of a project’s economic life.

Provisioning requirements for project finance: Project loans which are classified as ‘standard’ (i.e., which are not in default, or where the period of default does not exceed 90 days), are required to maintain a general provision as follows:

In case, the DCCO has been deferred, and the project loans continue to be classified as ‘standard’, then additional provisions of 0.375% for infrastructure project loans and 0.5625% for non-infrastructure project loans including for CRE and CRE – RH sectors must be maintained by lenders. For provisioning requirements applicable to project loans which have ceased to be classified as ‘standard’, the extant income recognition, asset classification and provisioning guidelines specified by RBI continue to be applicable.

Resolution of stress in project loans: Lenders have been advised by RBI to monitor build-up of stress in project loans on a regular basis and initiate resolution and recovery strategies well in advance. In case of default, delay in project operationalization, need for additional project funding or any other financial difficulties being faced by the project i.e., each a credit risk event under these directions, lenders are required to undertake a prima-facie review within 30 days to enter into an inter-creditor agreement and to decide on whether any resolution plan is to be implemented for resolution of stress of such project loans. Such decision is to be jointly taken by lenders representing at least 75% of aggregate project exposure and at least 60% by number.

Deferment of the agreed DCCO (along with a corresponding shift of repayment schedule) is permissible by up to 3 years for infrastructure projects, and by up to 2 years for non-infrastructure projects including projects in the CRE and CRE – RH sectors, without any deterioration in its asset classification.

In case of cost overrun of up to a maximum of 10% of the total project cost, additional project funding can be provided by lenders by way of a stand-by credit facility (SBCF), provided that: (1) Such SBCF was already sanctioned or the minimum risk premium applicable for such SBFC was specified in the loan agreement at the time of sanction of the initial project loan; and (2) Financial parameters such as debt-equity ratio, credit rating etc., remain unchanged or are enhanced for such additional funding.

In case of implementation of a resolution plan, all required documentation contemplated under the resolution plan along with the revised capital structure and revised treatment in the books of accounts must be consummated within a period of 180 days from the expiry of the ‘review period’ for such project loans i.e., within 210 days from the occurrence of the credit risk event or default. For resolution of stress in case of projects in their operational phase, the extant guidelines under the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 continue to be applicable.

Key takeaways

The Reserve Bank of India (Project Finance) Directions, 2025 aims to provide a clear and standardized framework for regulation of project finance in India, thereby enhancing transparency, consistency and enforcement, and outlining important credit risk mitigation strategies to ensure that time and cost overruns due to delays in obtaining of project-related licenses and regulatory approvals and land acquisition challenges are adequately addressed, even prior to sanction and origination of project loans in future.

Under its draft guidelines of 2024, RBI had initially prescribed a significantly higher general provision of 5% to be held by lenders, which suggestion had received criticism from lenders and market participants which was taken cognizance of by RBI. The provisioning requirements have been specified by RBI to ensure prudential accounting treatment of such financial assets in the books of accounts of lenders, commensurate with and calibrated to the perceived higher credit risk for lending to such sectors.

The measures announced by RBI are likely to enhance more prudent lending practices, reducing risk of defaults and non-performing assets plaguing infrastructure and project financing, and in turn, promoting easier and cheaper access to capital, infrastructure development, attracting more private investments, and driving growth and development.

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Disclaimer: This article is general in nature and is not intended to be a substitute for specific legal advice. Please contact the author(s) for specific legal advice in this regard.

[1] Economic Survey of India Report, Page 163, 2024-2025