In June 2019, the RBI introduced the Prudential Framework for Resolution of Stressed Assets but excluded project loans from this. due to this, our client, a mid-sized NBFC with over Rs 1000 crore exposure across renewable energy, logistics and infrastructure often found itself caught between commercial reality and regulatory rigidity. Some of their projects though viable, failed to meet the said timelines. Consequently, these loans remained subject to the outdated provisions of the 2015 Master Circular and subsequent RBI Scale-Based Regulation Directions. These legacy regulations have failed to adequately address the risks associated with project loans, particularly during construction. Project finance relies on anticipated cash flow, thus delays in project execution often resulted in unwarranted classification as non-performing assets (NPAs).
Acknowledging this discrepancy, the RBI proposed a draft of the Directions in May 2024 and on June 19, 2025 the RBI has finally issued the Project Finance Directions 2025, taking effect from October 1, 2025 to rationalize and harmonize regulatory guidelines applicable to project financing across various categories of regulated entities. These Directions will supersede a host of earlier circulars and will aim to address sectoral risks, streamline resolution mechanisms, and standardize prudential norms for financing large, capital-intensive projects.
This article unpacks RBI's Project Finance Direction and how its implementation might help to bridge the gap between regulation and reality in Project Finance.
Project Finance v/s Corporate Lending: Structural Comparison
| Aspect | Project Finance | Corporate Lending |
|---|---|---|
| Repayment source | Future cash flows from the specific project. | Borrower's existing operations and balance sheet |
| Risk assumed by lender | Dual risk: (i) project execution risk, (ii) credit risk from project cash flows. | Primarily credit risk. |
| Impact of delays | Delays may be non-credit related (e.g. regulatory or construction setbacks). | Delays usually reflect borrower distress. |
| Asset classification | May misrepresent actual risk if delays are not caused by borrower. | Based on payment default timelines. |
In project finance, the commencement delays are often beyond the control of the borrower and arise from non-financial factors. Under the earlier norms and regulations, strict classification rules like automatic down gradation of the credit status on non-payment upon non-payment were in adequate to differentiate between operational delays and genuine credit impairment. The new directions intend to rectify this issue by bringing about a more flexible, contextually aware framework, particularly using a broader trigger of the "Credit Event" as opposed to just "default".1
Overview, applicability and scope of the directions
The Project Finance Directions, 2025 are meticulously organized into five thematic pillars, each of which addresses a fundamental aspect of project loan regulation.
- They elucidate the definition of project finance by associating it with cash flow dependence and the presence of a unified agreement among lenders.
- delineate prudential standards for sanctioning, disbursement, and monitoring, which encompass minimum exposure thresholds.
- Stipulate differentiated provisioning requirements contingent upon the project's phase, along with supplementary provisioning for Date of Commencement of Commercial Operations (DCCO) deferments.
- Institute a framework for resolution and restructuring that is not solely predicated on default but rather on a more comprehensive notion of "credit events", incorporating mechanisms for DCCO extensions.
- Finally, the Directions impose stringent disclosure and reporting obligations to guarantee transparency and regulatory oversight.
The Directions represent a thorough and inclusive regulatory framework, encompassing both institutional scope and sectoral relevance. These Directions impose obligatory responsibilities on a broad spectrum of regulated entities, including all Commercial Banks (excluding Payments Banks, Regional Rural Banks, and Local Area Banks), all Non-Banking Financial Companies (NBFCs), which encompass Housing Finance Companies (HFCs) as well as Primary (Urban) Cooperative Banks and the All-India Financial Institutions (AIFIs). Thus, by including such a wide spectrum of lending institutions, the RBI has strived to ensure uniformity and consistency in the enforcement of prudential standards across the financial ecosystem.2
In a substantive context, the Directions pertain to project finance exposures covering both infrastructure and non-infrastructure sectors, which incorporate specialized categories such as Commercial Real Estate (CRE) and Commercial Real Estate – Residential Housing (CRE-RH). It is important to note that the Directions provide exemptions for projects that have previously achieved financial closure prior to the effective date specifically, before October 1, 2025. Regardless, this exemption is not without limitations. Projects initially exempt due to timing considerations will still be integrated into the regulatory parameters of the Directions should any new credit events or significant modifications in loan terms transpire after the effective date.3 In addition, NBFCs that prepare their financial statements in accordance with Indian Accounting Standards (Ind AS) are mandated to ensure compliance not only with these Directions but also with the pertinent provisions of the 2023 Scale-Based Regulations, thus maintaining coherence between sector-specific and accounting-based prudential standards.4
While the Directions uphold the principle of regulatory non-retroactivity with regards to pre-existing transactions, they do not permit such legacy projects to evade the new framework in circumstances where modifications post-October 2025 indicate heightened risk, altered structures, or declining performance. This guarantees that all substantial project finance activities, irrespective of their inception date, are ultimately governed by a unified regulatory standard.
Key Definitions under the Project Finance Directions, 20255
The Project Finance Directions, 2025 present an updated terminology essential for the framework's application and interpretation. These definitions aim to promote consistency among regulated entities and to encapsulate the unique economic and risk aspects of project finance transactions. Many of these terms bear important consequences for classification, provisioning, and restructuring decisions. Below is a discussion of the most notable definitions:
1. Project
The term Project is defined to include capital-intensive ventures aimed at creating or upgrading tangible assets or facilities, typically characterised by long gestation periods, irreversibility of investment, substantial capital outlay, with expectation of long term cash flow benefit and capital expenditure for creation/upgradation of tangible assets. This encompasses both greenfield and brownfield infrastructure and industrial undertakings.
2. Project Finance
Under the Directions, an exposure qualifies as Project Finance when at least 51% of the repayment is expected to be sourced from the project's cash flows and all lenders share a common agreement with the borrower. This marks a clear distinction from general corporate lending and places emphasis on project-specific cash flow viability rather than balance-sheet strength.
3. Date of Commencement of Commercial Operations (DCCO)
The Date of Commencement of Commercial Operations (DCCO) signifies the pivotal shift from construction to operational phase as revenue generation begins. The Directions acknowledge three forms of DCCO to accommodate project execution realities:
- Original DCCO: The initially projected date at financial closure for the commencement of operations and necessary certification acquisition.
- Extended DCCO: The revised date resulting from approved extensions due to valid delays such as regulatory issues or force majeure events.
- Actual DCCO: The date when the project achieves operational status and receives the completion or occupancy certificate.
Differentiating among these forms fosters a balanced methodology, the Original DCCO maintains discipline and foresight, the Extended DCCO allows for legitimate delays, and the Actual DCCO indicates actual operational readiness.
4. Credit Event
The term Credit Event encompasses a more extensive array of triggers than a traditional default. It includes:
- Any failure to fulfill a payment obligation to a lender,
- The extension or expiry of the original or extended DCCO, as the case maybe,
- The determination by any lender regarding the necessity to infuse additional debt,
- The ascertaining of financial distress by any lender (regardless of default), and
- The commencement of resolution proceedings under the relevant legal frameworks.
This expansive definition ensures that lenders are positioned to proactively address emerging stressors prior to their escalation into default, thus facilitating early and coordinated resolution initiatives.
5. Standby Credit Facility
The term Standby Credit Facility (SBCF) denotes a contingent credit facility authorized at the stage of financial closure to mitigate cost overruns that may occur during the construction phase. Should it be pre-sanctioned and perpetually renewed, SBCF may be utilized without influencing asset classification. Conversely, any new financing must be subjected to a premium rate, as stipulated in the loan agreement.
6. Financial Closure
The term Financial Closure is designated as the date upon which the capital configuration of the project, encompassing of debt, equity, and grants, accounting for no less than 90% of the aggregate project cost attains legal enforceability. This significant milestone functions as the foundation for establishing the Original DCCO and for facilitating the disbursement of funds.
7. Commercial Real Estate (CRE) and CRE-Residential Housing (CRE-RH)
Defined in the Directions on Classification of Exposures as Commercial Real Estate Exposures, CRE denotes loans reliant on the income generated by the real estate asset itself. This generally encompasses office buildings, shopping centers, warehouses, hotels, and multi-family residential complexes that are transacted in the market. The defining characteristic of CRE compared to other real estate financing is that loan repayment and recovery in default are intrinsically linked to the asset's cash flows, such as rental income or sales proceeds.
With respect to the Commercial Real Estate-Residential Housing (CRE-RH), acknowledging the lower risk and volatility associated with residential housing projects, the RBI established a specific sub-category termed CRE-RH through a notification on June 21, 2013. This category includes loans extended to builders or developers for residential projects intended for sale, rather than personal use. To qualify as CRE-RH, the project must primarily consist of residential units, with commercial areas such as shops or schools not exceeding 10% of the total built-up area. Should the commercial area surpass this 10% limit, the project is classified as CRE instead of CRE-RH. This differentiation carries significant regulatory implications, as CRE-RH projects benefit from more advantageous conditions, including a reduced risk weight of 75% (compared to 100% for CRE) and less stringent provisioning requirements (0.75% versus 1%).
8. Resolution Plan
A resolution plan is defined as a collaboratively developed, legally binding, feasible, and time-sensitive accord designed to alleviate distress within a project loan account. The plan may encompass measures such as restructuring, alteration of ownership, infusion of supplementary capital, extension of the Date of Commencement of Commercial Operations (DCCO), or any amalgamation of the aforementioned actions.
9. Infrastructure Sector
The Directions endorse the officially recognized Harmonised Master List of Infrastructure sub-sectors, as communicated by the Department of Economic Affairs, Ministry of Finance. This classification holds significance for the purposes of ascertaining provisioning rates and allowable extensions of the DCCO.
Project Lifecycle Framework6
The Directions embrace a lifecycle-oriented approach to regulation, acknowledging that the risk profiles associated with projects develop and transform over time. Three distinct phases are identified:
- Design Phase: Encompasses the period from project conceptualisation to the attainment of financial closure. This phase encompasses site selection, regulatory approvals, and the structuring of financial arrangements.
- Construction Phase: Initiates upon achieving financial closure and persists until the actual DCCO. This phase is characterised by the highest levels of execution and funding risk.
- Operational Phase: Commences once the project has been commissioned and begins to generate cash flows. In this phase, provisioning and risk recognition are facilitated with greater ease.
By segmenting the project timeline in this manner, the RBI empowers lenders to fine-tune their risk management, provisioning, and monitoring strategies in a more detailed and efficient manner.
Prudential Requirements for Lending7
The Directions delineate rigorous prudential standards that must be strictly observed by lenders throughout the lifecycle of project finance transactions. These include:
- Minimum Exposure Thresholds: No individual lender shall retain less than 10% of the total exposure in projects wherein the aggregate lending does not exceed ₹1,500 crore. For projects of greater magnitude, each lender is obligated to maintain a minimum of ₹150 crore or 5% of the total exposure, whichever amount is greater. This provision ensures the alignment of interests and fosters thorough credit assessment.
- Conditions Precedent for Disbursement: Prior to the disbursement of funds, lenders are required to ascertain that essential preconditions have been satisfied, which include the acquisition of land (at least 75% or 50% for PPP projects), all necessary regulatory approvals, and a comprehensive Techno-Economic Viability (TEV) study.
- Proportionate Disbursal: The disbursement of funds must be correlated with the phase of project completion and the infusion of equity. An independent verification and certification of progress by a qualified technical expert is mandated.
- Monitoring and Information Sharing: Continuous oversight of implementation milestones is obligatory, and all lenders are required to disseminate critical project-level information through a centralized database.
Provisioning Requirements
Provisioning is essential in financial regulation, acting as a safeguard for lenders against credit losses. In project finance, varying risks across project phases necessitate a tailored provisioning approach to accurately reflect risk and encourage lending. Acknowledging this, the RBI has evolved its provisioning framework in three phases: the SBR, the 2024 Draft Directions, and the current 2025 Directions. The SBR did not differentiate between the construction and operational stages of a project. A standardized provisioning rate of 0.75% for CRE-RH, 1% for CRE, and 0.4% for other loans was implemented, regardless of a project's phase. This uniformity inadequately represented the increased risks in under-construction projects due to potential setbacks.8 The Draft Directions proposed a conservative provisioning of 5% during construction and 2.5% during operation, adjustable to 1% if conditions pertaining to cash flows and debt reduction were met.9 Despite intentions to create early financial buffers, these draft norms were deemed excessively stringent for long-term infrastructure projects with gradual cash flow stabilization. Following stakeholder insights, the Directions delineate a phase-oriented provisioning framework that is attuned to the risks associated with the project lifecycle:
- Standard Asset Provisions:10
- Construction Phase: 1.25% for Commercial Real Estate (CRE), 1.00% for Commercial Real Estate - Residential Housing (CRE-RH) and other projects
- Operational Phase: 1.00% for Commercial Real Estate (CRE), 0.75% for Commercial Real Estate - Residential Housing (CRE-RH), 0.40% for other sectors
- Additional Provisions for DCCO:11
- Infrastructure Projects: 0.375% per quarter of extension
- Non-Infrastructure Projects: 0.5625% per quarter of extension
These supplementary provisions are rescinded upon the initiation of commercial operations. This strategy fosters the prompt completion of projects while simultaneously offering safeguards during the construction phase.
Prudential Conditions for Disbursement and Monitoring12
The Directions stipulate conditions for fund disbursement and monitoring throughout the project's duration. Lenders must ensure completion of project approvals, land acquisition, equity infusion, and technical due diligence prior to the initial disbursement. Furthermore, disbursement must correspond with certified progress milestones to mitigate premature financial exposure.
Monitoring obligations are stringent. Lenders are required to monitor project execution against set milestones, with independent verification of critical deliverables. Any major discrepancies from the approved timeline or scope must be reported and resolved promptly within the consortium. The mandate for a centralized database enhances transparency and supports coordinated decision-making among lenders.
Prudential Norms for Resolution13
The Directions signify a significant departure from the conventional default-based resolution framework by introducing the notion of a "credit event" as the catalyst for the initiation of resolution. This encompasses not solely payment defaults but also scenarios such as DCCO deferment, emerging concerns regarding viability, the necessity for supplementary funding, or formal acknowledgment of stress by any consortium lender. Upon the occurrence of a credit event, lenders are mandated to execute a resolution plan within a period not exceeding 180 days from the conclusion of the review period.
The resolution plan must be both feasible and legally binding, while also being time-constrained. It may encompass one or more measures including the restructuring of repayment terms, the infusion of additional equity or quasi-equity, alterations in project ownership, or modifications to the DCCO. Notably, the Directions permit the extension of the DCCO without a downgrade in asset classification, contingent upon the project being regarded as viable and the resolution being finalized within the prescribed timeframe.
DCCO Extensions and Related Safeguards14
Recognizing inevitable project delays, the Directions allow DCCO deferment of up to three years for infrastructure projects and two years for non-infrastructure projects without asset classification downgrade, provided justification through a fresh TEV study is given, and cost overruns do not exceed 10% unless SBCF are pre-agreed. Additional provisioning is required during the extension period until the project reaches actual commercial operations. The deferment must be formally documented in the resolution plan and submitted to the lead lender's Board. These measures ensure regulatory flexibility is accompanied by accountability and disciplined project oversight.
Conclusion
The RBI's Project Finance Directions, 2025, signify a pivotal change in India's infrastructure and capital lending regulation. By addressing the regulatory discrepancies between project finance and traditional frameworks, the Directions create a proactive regime focused on risk differentiation and project lifecycles. These reforms primarily introduce a shift from a default-cantered approach to one that emphasizes credit events, facilitating early detection of distress and enabling timely resolutions. Notably, the revised provisioning requirements and lifecycle-based asset classifications enhance financial stability and support credit to feasible yet delayed projects. Legally and strategically, the Directions necessitate an adjustment in lending and documentation practices. Lenders, borrowers, and advisors must revise project finance contracts and compliance mechanisms to align with new prudential standards and risk monitoring requirements.
In conclusion, the Directions signify more than just regulatory changes, they embody the RBI's evolved, principles-based approach to financial regulation that is cognizant of India's infrastructure financing needs. If fully implemented, the Project Finance Directions, 2025, could be fundamental in establishing a more resilient and sustainable project finance environment in India.
Footnotes
1. Project Finance and Corporate Finance: An overview. (n.d.). https://www.resurgentindia.com/project-finance-and-corporate-finance-an-overview
2. Part II (E), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
3. Part II(F), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
4. Part II(E)(6), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
5. Part II(F), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
6. Part III(G), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
7. Part III(H)(I), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
8. Finserv, T. (2022, September 23). Differential Standard Asset Provisioning for NBFC-UL. https://vinodkothari.com/2022/06/differential-standard-asset-provisioning-for-nbfc-ul/
9. Chaturvedi, V. & Reserve Bank of India. (2024). Reserve Bank of India - Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances - Projects Under Implementation, Directions, 2024.
10. Part IV(N), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
11. Part IVO), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
12. Part III(I), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
13. Part IV(J)(K), Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
14. Part IV (K) Reserve Bank of India. (2025). [Reserve Bank of India (Project Finance) Directions, 2025] (Report RBI/2025-26/59). https://www.rbi.org.in
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