MUMBAI: In a big relief to banks, the Reserve Bank has issued the final directions on project finance, asking lenders to maintain general provision of 1.25%, as against the 5% proposed in the draft norms, on commercial real estate, and 1% each on commercial real estate-residential housing and other portfolios during the construction phase. The new relaxed norms will come into force from October 1.
In February, governor Sanjay Malhotra had said project financing norms would get deferred by a year and are not to going be implemented before the end of March 2026.
This is the second major regulatory step that the RBI under Malhotra has taken after putting off the expected credit loss guidelines.
The RBI further said on Thursday that this new regime for resolution of exposure to stressed assets has also been harmonized across regulated entities.
Under the new norms, banks shall have to maintain 1% general provision on commercial real estate projects during the operational phase after commencement of repayment of interest and principal, 0.75% on residential housing, and 0.40% on all other projects, the regulator said.
The provisioning was sharply lower than what was mentioned in the draft norms, which proposed that banks set aside a provision of 5% of the loan amount when the project is in the construction phase, reduced to 2.5% once it becomes operational and then down to 1% after the project starts generating cash sufficient to cover lenders’ repayment.
AM Karthik, a senior vice-president & co-group head of financial sector ratings at Icra Ratings, said, “The final guidelines come as a relief to lenders as for operational projects the extant requirement continues at 0.4%, which is lower than 1-2.5% indicated in the earlier draft. For under-construction projects, provisions are kept at 1% vis-a-vis 5% suggested in the draft. This is however higher than 0.4% applicable for banks now.”
He sees only limited impact on NBFCs as sufficient provisions are provided as per the expected credit loss assessment and provisioning at present is closer to the requirement as per the guidelines. Also, since the provisions are prospective from October 1, 2025, the overall impact for lenders is limited, he added.
As per the final regulations, if the date of commencement of commercial operations' deferment is classified as standard, lenders have to make additional specific provisions of 0.375% for infrastructure project loans and 0.5625% for non-infrastructure project loans, including commercial and residential realty, for each quarter of deferment.
The central bank further said banks have to monitor the performance of the project and any build-up of stress on an ongoing basis during construction phase and shall be expected to initiate a resolution plan well in advance.
Any such credit event shall be reported to the central repository of information on large credit (CRILC) by the lender on a weekly basis as well as the CRILC Main report, the RBI said. The bank shall also have to undertake a prima facie review of the debtor account within 30 days from the date of such a credit event.
The central bank said the upgradation of NPAs can only happen after the account performs satisfactorily after the actual date of commencement of operations. The project finance account downgraded to NPA can be upgraded after successful implementation of the resolution plan, provided no further request for date of commencement of operations deferment is received, the RBI added.
Before fund disbursement, a lender shall have to ensure there is sufficient land of 50% for infrastructure projects under PPP model, and 75% for all other projects.