In relief to lenders, RBI eases provisioning norms for infrastructure financing

The RBI, in its final guidelines, has mandated that banks set aside only 1% of standard asset provisioning for projects under construction. It has, however, retained the provisioning requirement for operational projects at 0.4%. The provisioning requirement for loans for under-construction commercial real estate will be slightly higher at 1.25%. 

The new norms come into effect from October.

Also read: Retail investors want a piece of NSE. But no one is selling

This is a major relaxation from the draft guidelines released in May last year that had proposed that lenders must set aside 5% of the loan amount—for potential losses—for an under-construction project, 2.5% for those already operational and 1% once the project has adequate cash flow to repay obligations.

“Rationalization of standard asset provisioning requirement to 1% for projects under construction, which shall gradually increase for each quarter of DCCO (date of commencement of commercial operations) deferment," said RBI.

Separately, RBI has permitted deferment of date of commencement of commercial operations to up to three years for infrastructure projects and up to two years for non-infra projects.

This is a bit tougher from the draft norms, which allowed up to four years of extension of DCCO due to all types of risks including legal.

Also read: Affordable housing financiers become market darlings after RBI rate cut

“Final guidelines on project finance comes as a relief to the 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 project finance, provisions are kept at 1% vis-a-vis 5% suggested in the draft. This is however higher than 0.4% applicable at present for banks," Karthik Srinivasan, group head, financial sector ratings, ICRA, said.

He sees 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, the provisions are applicable prospectively, from October 2025 and, thus overall impact for lenders shall be limited," he added.

The RBI, under governor Sanjay Malhotra, has been taking steps to stimulate credit demand. Since January, the central bank has reduced risk weights on bank loans to small borrowers and non-bank lenders, eased rules for small-ticket gold loans and relaxed rules around strict liquidity requirements for banks.

In its final guidelines, the RBI has retained the individual lender exposure at not less than 10% of the aggregate exposure for under-construction projects where the aggregate exposure of the lenders is up to ₹1,500 crore.

For projects where aggregate exposure of all lenders is more than ₹1,500 crore, the exposure floor for an individual lender shall be 5% or ₹150 crore, whichever is higher.

Also read: Alcohol’s become much more expensive in Maharashtra—but will still find takers

The RBI has relaxed the conditions for disbursement of funds. As per the new norms, infrastructure projects under public-private partnership (PPP) model need to ensure only 50% of the land available before disbursement. For non-PPP and commercial real estate projects, this requirement has been pegged at 75%. Currently, National Highways Authority of India projects under the annuity model need to ensure 90% of the land is made available before disbursement.