MUMBAI: The Reserve Bank’s final directions on project financing will help strengthen the guardrails against risk in project financing and also harmonise regulations for all lenders, besides easing credit cost concerns as they seek only lower provisioning, that too with prospective applicability.
The final directions, which will come into effect from October 1, 2025, asks only 1-1.25 per cent provisions from the date of commencement of commercial operations (DCCO) as against 5% proposed in the draft earlier.
The new guidelines cover both infrastructure and non-infrastructure projects, including commercial real estate -residential housing- and apply to banks, non-banking financial companies, housing finance companies, urban cooperative banks and all-India financial institutions.
The draft guidelines had laid out very stringent provisioning norms, with 5% provisioning on all under-construction projects, which went up to as high as 7.5% in some scenarios. Even for operational projects, provisioning level was mandated at 1% or 2.5% depending on the extent of operating cash flows of the project
“Compared to the draft of May 2024, the final directions improve the ease in doing business for lenders. The provisioning requirements are significantly lower, not only in the case of under-construction projects but also for operational projects. Additionally, the guidelines are applicable only on a prospective basis. As a result, the impact on credit costs would be well below what was envisaged earlier,” Subha Sri Narayanan, a director with Crisil Ratings said in a note Thursday.
“The removal of the proposed six-month limit on moratorium period after date of commencement of commercial operations (DCCO) will also benefit lenders, allowing them to continue to structure loans in line with the expected cash flows of projects,” Narayanan said.
Standard asset provisioning for operational projects remains in line with the extant guidelines for banks and upper-layer non-banking finance companies, ranging from 0.4-1% depending on the segment.
However, provisioning requirements across categories remain de-linked from the credit risk profile of individual projects, as indicated by credit rating. This is unlike the extant capital requirements for bank lending to corporates, which are linked to the credit risk profiles of the latter, the report said.
The proposed provisioning requirements also remain sector-agnostic, even as various sectors may carry diverse levels of risks, including different levels of ultimate loss-given defaults.
According to Sonica Gupta, an associate director with the agency, there is unlikely to be a significant impact on lending rates and consequently, on the borrowing costs of under-construction projects. This is because the final directions are applicable only on a prospective basis, and hikes in the base provisioning requirement are relatively lower compared with what was envisaged in the draft guidelines.
These directions will also provide a growth fillip, with many lenders sitting on the fence thus far pending clarity on the final provisioning requirements and their applicability. All this should facilitate funding for the expected capital expenditure outlay of Rs 125-135 trillion over fiscals 2026-2030.
The increased provisioning requirements for project finance will also enhance the resilience of the financial sector.
Historically, the sector has grappled with substantial stress due to challenges in project execution, such as delays, cost overruns and regulatory hurdles. With provisioning levels rising moderately for under-construction projects, lenders will be better equipped to absorb potential losses.
These requirements will also promote more prudent lending practices, as lenders are incentivised to evaluate project viability and creditworthiness very carefully. Directions like ensuring availability of sufficient land/right of way under the prudential conditions related to disbursement and monitoring should ensure better lending practices by the lenders.
Notably, the incremental provisioning requirements are unlikely to pose a significant burden on lenders because their profitability and capitalisation levels are strong, which affords headroom to absorb the additional cost.
Source: The New Indian Express
