The Reserve Bank of India, on 19 June 2025, notified the Reserve Bank of India (Project Finance) Directions, 2025, establishing a harmonised regulatory framework governing the financing of infrastructure and non-infrastructure projects by banks, non-banking financial companies, housing finance companies, and all India financial institutions. The Directions take effect from 1 October 2025.
Background
Project finance in India has operated under a patchwork of circulars and guidelines issued over the years, with different provisions applicable to different categories of regulated entities. The RBI had flagged the need for a unified framework in its discussion papers, noting that the existing regime created inconsistencies in risk assessment and provisioning standards across lenders funding the same project.
The new Directions aim to address long-standing concerns around asset quality recognition in project loans, particularly regarding the treatment of delays in achieving the Date of Commencement of Commercial Operations (DCCO) and cost overruns, which have historically been areas of regulatory forbearance.
Key Provisions
The Directions establish the following framework:
Project finance definition: An exposure qualifies as project finance only if the predominant source of repayment — at least 51 per cent as envisaged at financial closure — is from cashflows generated by the project being financed, and all lenders must have a common loan agreement.
DCCO extension treatment: Projects remain classified as standard if DCCO extensions within the resolution plan fall within permissible limits of three years for infrastructure projects and two years for non-infrastructure projects. Extensions beyond these limits trigger asset classification downgrades.
Cost overrun management: Cost overruns up to 10 per cent attributable to DCCO extensions may be funded through pre-approved Standby Credit Facilities that must have been sanctioned at financial closure. This prevents post-hoc credit expansion to mask project stress.
Stress resolution framework: Lenders are required to actively monitor projects and initiate resolution plans promptly upon identifying stress. The definition of "credit event" has been broadened to trigger early collective resolution among consortium lenders.
Applicability: The Directions apply to all commercial banks (excluding payment banks, local area banks, and regional rural banks), NBFCs including housing finance companies, primary urban cooperative banks, and All India Financial Institutions.
Scope of projects: The framework covers both infrastructure and non-infrastructure projects, including commercial and residential real estate developments.
Implications for Practitioners
The October 2025 effective date gives regulated entities approximately four months to align their existing project finance portfolios with the new framework. For banks and NBFCs with significant project lending books, the transition will require a comprehensive review of existing loan agreements, particularly around DCCO extension clauses and standby credit facility provisions.
The mandatory Standby Credit Facility requirement at financial closure is a significant shift. Lenders that have historically sanctioned additional facilities on an ad-hoc basis to address cost overruns will need to restructure their credit approval processes. This also affects project sponsors, who must factor in SBCF costs at the initial project structuring stage.
The broadened definition of credit event and the emphasis on early collective resolution among consortium lenders are designed to prevent the delayed recognition of project stress that has historically contributed to asset quality deterioration in the Indian banking sector. Legal advisors working on project finance transactions should carefully review the new credit event triggers to ensure loan documentation reflects these updated requirements.