RBI issues project finance instructions, banks to provide 1-1.25% for projects under construction

Asset provisioning necessities shall be lowered on the time of operational part. 
| Photo Credit: DANISH SIDDIQUI

The Reserve Bank (RBI) on Thursday issued RBI (Project Finance) Directions 2025 asking Regulated Entities (REs) to keep normal provision of 1.25% for under construction Commercial Real Estate (CRE) loans and 1% for infrastructure projects under construction.

However, asset provisioning necessities shall be lowered on the time of operational part. 

This fee is way decrease than the of provision of 5% proposed within the draft for under construction projects, 2.5% within the operational stage and 1% at money era stage to cowl the mortgage. 

The instructions have been issued to institutionalise a framework for the REs for financing project loans, whereas addressing the underlying dangers.

The instructions entail adoption of a principle-based regime for decision of stress in project finance exposures, harmonised throughout REs and rationalisation of permissible ‘date of commencement of commercial operations’ (DCCO) extensions with an total ceiling of three and two years for infrastructure and non-infrastructure sectors, respectively.

The instructions provide flexibility to REs in extending the DCCO inside the above ceilings, primarily based on their business assessments.

The normal asset provisioning requirement has been rationalised to 1% for projects under construction, which can progressively enhance for every quarter of DCCO deferment. 

“The requirements for under construction CRE exposures will be however, slightly higher at 1.25%,” in accordance to the notification.

“Under construction projects where financial closure has already been achieved shall continue to be guided by the extant provisioning norms to facilitate a seamless implementation,” the notification mentions.

During operational part, the usual asset provisioning requirement will stand lowered to 1% for CRE, 0.75% for CRE-RH [Residential Housing] and 0.40% for different project exposures, respectively.

The instructions will come into drive with impact from October 1.

The RBI had issued draft tips on ‘Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances – Projects Under Implementation’ on May 03, 2024, for stakeholder feedback. 

As a part of the stakeholder session train, inputs / suggestions have been acquired from round 70 entities together with banks, NBFCs, trade associations, academicians, legislation corporations, people and the Central Government, the RBI mentioned.

The inputs/ suggestions acquired had been examined and suitably integrated whereas formalising the ultimate Directions, it added.