In a major relief for banks and non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) has significantly eased its proposed prudential norms on project finance. According to Citi Research, the final directions—effective October 1, 2025—are far more lender-friendly than the draft guidelines issued earlier, particularly in terms of general provisioning norms.
Under the final framework, general provisioning requirements for project finance exposures—both infrastructure and non-infrastructure (including commercial real estate or CRE)—have been substantially reduced. For loans in the construction phase, the provisioning has been capped at 1.00% (1.25% for CRE), a significant relaxation from the earlier phased-in draft requirement of 5% by FY27 (2% in FY25, 3.5% in FY26, 5% in FY27).
For exposures in the operational phase (i.e., post commencement of principal and interest repayments), provisioning has been scaled down to:
-
1.00% for CRE
-
0.75% for CRE-RH (residential housing)
-
0.40% for all other categories
This is markedly softer than the earlier suggested 2.5% in the draft guidelines.
For projects where the Date of Commencement of Commercial Operations (DCCO) has been deferred but remains classified as standard, the RBI has prescribed additional specific provisions. These are set at 0.375% per quarter for infrastructure loans, and 0.5625% per quarter for non-infra loans, including CRE and CRE-RH segments.
Citi believes this shift removes a major overhang for lenders, particularly public sector banks and infrastructure-focused financial institutions like PFC, REC, and IIFCL. The biggest concern post the draft circular was a sharp pullback in long-gestation project lending owing to the capital burden posed by high provisioning. That risk now appears largely mitigated.
By easing the regulatory cost of lending to large, long-term projects, the RBI has significantly improved the economic viability of project finance, which is essential for funding India’s infrastructure ambitions. The move may also unlock higher credit growth in the infrastructure segment in FY26 and beyond.
