Understanding RBI’s Project Finance Guidelines: What They Mean for Future Projects

By Mr. Sanjeev Pandey, CEO, AIPE

Introduction

Imagine you’re building a big project, like a new highway, a power plant, or a housing complex. These projects need a lot of money, often borrowed from banks or financial institutions. To make sure this lending is done responsibly, the Reserve Bank of India (RBI) has introduced new rules called the Reserve Bank of India (Project Finance) Directions, 2025, effective from October 1, 2025. These rules guide banks and other lenders on how to fund such projects safely, ensuring they don’t lose money and projects get completed successfully. This article explains, in simple terms, why these rules exist, what they involve, how past lending mistakes have shaped them, and how they might affect future projects and their financing.

Why Do We Need These Guidelines?

Big projects, like bridges, factories, or apartment complexes, take years to build and require huge investments. Lenders, like banks or non-banking financial companies (NBFCs), provide loans expecting the project to generate revenue (like tolls from a highway or rent from buildings) to repay the debt. However, projects can face delays, cost overruns, or other problems, making it hard to repay loans on time. If too many loans go unpaid, banks could face financial trouble, which could harm the economy.

The RBI introduced these guidelines to:

• Protect Lenders: Ensure banks and institutions lend money carefully, reducing the risk of loans turning “bad” (non-performing assets or NPAs).
• Ensure Project Success: Make sure projects are well-planned and monitored, so they start generating revenue as expected.
• Build Trust in Markets: Transparent and fair financing practices, aligned with SEBI’s focus on clear valuations, help investors and the public trust the financial system.

These rules replace older guidelines and apply to new projects starting after October 1, 2025, covering infrastructure (e.g., roads, ports), non-infrastructure (e.g., factories), and real estate projects.

A Look Back: How Project Funding Faltered in the Past

To understand why these guidelines are so important, let’s look at what happened in the past. Between 2005 and 2008, during a period of rapid economic and credit growth, banks in India, including big players like the State Bank of India (SBI), lent heavily to infrastructure projects like roads, power plants, ports, and real estate besides many greenfield manufacturing projects. This aggressive lending led to a massive problem when many of these projects didn’t go as planned—delays, cost overruns, or poor planning meant they couldn’t generate enough money to repay loans.

For example, SBI, in year 2017 transformed in Stressed Asset Management Group (SAMG) into a restructured unit called the Stressed Assets Resolution Group (SARG) to handle bad loans while changing focus from Recovery to Resolution. All Bad loans transferred to SARG from other verticals, were divided into three sectors: Steel, Infrastructure, and Others. The Infrastructure sector alone had bad loans worth around ₹1 lakh crore—almost as much as the total assets of smaller banks like Punjab & Sind Bank or Dena Bank (now merged). This wasn’t just SBI’s problem; other major public and private banks faced similar issues, with project finance NPAs making up 30-40% of their total bad loans.

There were many NPAs from Projects funded under Infra and manufacturing sector. Recovery was tough—while steel sector bad loans saw over 50% recovery through resolution or liquidation under IBC, infrastructure projects often ended up in liquidation with little recovery (Lanco Infra Ltd, with debt running to almost Rs.47,000 Crore and which went into Liquidation, the percentage of recovery was in single digits). It was only after the COVID-19 pandemic, when demand for power surged, that some power sector assets found buyers. These past failures showed the RBI that loose lending practices could destabilize banks, prompting the new, stricter guidelines to prevent a repeat.

Why Do We Need These Guidelines?

Now, Imagine you’re building a big project, like a new highway, a power plant, or a housing complex or even a new factory. These projects need a lot of money, often borrowed from banks or financial institutions. With the above background of huge NPAs and write-offs in Project funding, RBI has to make sure this lending is done responsibly in future to avoid a similar situation.

Accordingly, the Reserve Bank of India (RBI) has introduced new rules called the Reserve Bank of India (Project Finance) Directions, 2025, effective from October 1, 2025. These rules guide banks and other lenders on how to fund such projects safely, ensuring they don’t lose money and projects get completed successfully. This article explains, in simple terms, why these rules exist, what they involve, and how they might affect future projects and their financing.

Big projects, like Roads, bridges, Power plants, factories, or apartment complexes, take years to build and require huge investments. Lenders, like banks or non-banking financial companies (NBFCs), provide loans expecting the project to generate revenue or cash-flows (like tolls from a highway or rent from buildings) to repay the debt. However, projects can face delays, cost overruns, or other problems, making it hard to repay loans on time. It is not because the Banks don’t know how the lend. It is because due to extended timelines the variables can be too many.

For example the cost of raw materials like Steel, cement, bitumen can up. Then there can be Regulatory changes. For example, sudden change in compensations provided under new Land Acquisition Act introduced by Dr. Manmohan Singh Govt increased the input costs of land for Infrastructure project under Roads, Power, Bridges and Real Estate sectors. Similarly, delays in Green clearances delayed many projects. As the price of inputs went up and projects got delayed, the expected cashflows did not turn up and borrowers defaulted. If too many loans go unpaid, banks could face financial trouble, which could harm the economy.

The RBI introduced these guidelines to:

• Protect Lenders: Ensure banks and institutions lend money carefully, reducing the risk of loans turning “bad” (non-performing assets or NPAs).

· Ensure Project Success: Make sure projects are well-planned and monitored, so they start generating revenue as expected.

· Build Trust in Markets: Transparent and fair financing practices, aligned with SEBI’s and IBBI’s focus on clear and more realistic valuations, help investors and the public trust the financial system.

These rules replace older guidelines and apply to new projects starting after October 1, 2025, covering infrastructure (e.g., roads, ports), non-infrastructure (e.g., factories), and real estate projects.

Key Points of the RBI Guidelines

The RBI’s rules are like a playbook for banks to follow when funding projects. Here’s what they include:

1. Project Phases: Projects are split into three stages:

o Design Phase: Planning, designing, and getting approvals (like environmental or legal clearances) before funding starts. In the past, banks made the mistake of funding the projects even before environmental or legal clearances were received or power projects where even before fuel supply agreements or Power Purchase Agreements were signed. This led to major write-off in many project loans.

o Construction Phase: Building the project, from the time funding is secured until it starts operating.

o Operational Phase: When the project is running and generating revenue to repay loans.

2. Careful Lending Rules: Banks now must ensure the project has secured at least 90% of its funding (called financial closure) and a clear start date (Date of Commencement of Commercial Operations, or DCCO) before lending.

1. For example, a housing project needs an occupancy certificate by the DCCO, while a highway needs a completion certificate.
2. Lenders must check that enough land is available (50% for public-private partnership infrastructure, 75% for others) before giving funds. This takes care of projects getting stuck due to huge delays in acquiring land.
3. Repayment schedules must be realistic, based on expected cash flows, and not stretch beyond 85% of the project’s useful life (e.g., a bridge’s lifespan).

3. Handling Delays and Problems:

o   If a project faces issues like delays or cost increases (called a “credit event”), banks must act quickly, within 30 days, to create a resolution plan. This might involve extending the DCCO or adding more funds.

1. For delays, infrastructure projects can get up to 3 years extra, and non-infrastructure projects (like real estate) up to 2 years, without being labelled “bad loans” (NPAs), if conditions are met.
2. If costs rise due to a bigger project scope (e.g., adding more lanes to a road), banks can still treat the loan as “standard” if the cost increase is 25% or more and the project remains viable.

4. Reserving Money for Safety:

o   Banks must set aside extra money (provisions) to cover potential losses:

1. During construction: 1.25% for commercial real estate, 1% for others.
2. After operation starts: 1% for commercial real estate, 0.75% for residential real estate, and 0.4% for others.

o   If the DCCO is delayed, extra provisions (0.375% per quarter for infrastructure, 0.5625% for others) are required until the project starts operating.

5. Transparency and Monitoring:

o   Banks must keep detailed project records, like costs, debts, and repayment plans, in a database updated within 15 days of changes.

1. They must report project financing details in their financial statements, so everyone knows what’s happening.
2. An independent engineer or architect must verify construction progress before funds are released.

6. Penalties for Mistakes:

1. If banks don’t follow these rules or policies, they could face penalties or other actions from the RBI.

How These Rules Might Affect Future Projects

The RBI’s guidelines will shape how projects are planned, funded, and completed in India. Here’s what they mean for the future:

• Stricter Planning: Project developers (like companies building roads or housing) will need to plan better, securing land, approvals, and at least 90% of funding before banks release money. This could delay some projects but ensures only well-prepared ones get funded.

· Higher Costs for Borrowers: Banks may charge higher interest rates for extra provisioning required under the guidelines. Higher interest on extra funding needed due to delays or cost overruns, especially if not pre-planned. This makes borrowing more expensive for developers.

· Fewer Bad Loans: By requiring realistic repayment plans and early action on problems, banks are less likely to end up with unpaid loans, making the financial system stronger. Banks experience of burning their hands in project funding and low recovery from Infra projects, will also help them in planning better terms and conditions and covenants for fresh project funding. Margins on various underlying securities like land, building, P&M is also likely to go up.

· Better Project Outcomes: One of the deficiency in earlier round of Project funding was inadequate Loan administration. While the members banks of a Proejct funding consortium left monitoring to the Lead Bank, the Lead bank under pressure from large volume of loans did not monitor the project diligently. Now under new guidelines, Banks can appoint independent experts for close and professional monitoring of projects and detailed record-keeping . This will mean projects are more likely to finish on time and within budget and unscrupulous borrowers will have lesser options to divert funds from one project to another.

· Real Estate Impact: Real estate projects, especially commercial and residential housing, face stricter rules (like 75% land availability). Introduction of RERA and IBC and shifting of onus of monitoring of Real Estate projects on financing Banks will lead to better financial discipline by borrower and better loan administration by banks. This could slow down some developments but will ensure only viable projects move forward.

· Trust in Markets: Clear rules, combined with impact of IBC of borrower behaviour, SEBI’s push for transparent valuations (like ensuring project costs are accurately assessed), and better follow up of registered projects by state RERA Authorities will make investors more confident in putting money into India’s markets.

Challenges and Considerations : While these rules aim to make project financing safer, they might create challenges:

• Tighter Rules, Slower Starts: Many Developers/Promoters may struggle to meet requirements like land availability or financial closure, delaying projects. This may lead to a wave of consolidations where smaller players will merging or collaborating with larger players, which will only improve the outcomes for the end-user.

· Higher Costs: Extra provisions and higher interest rates for delays could raise project costs, which might be passed on to consumers (e.g., higher home prices). But in my opinion, high home prices with getting keys to the flat is more important than promises of cheaper homes which are never delivered. Similarly in other projects also, some additional cost does not matter in the long run, what matters is the project is implemented and delivers on estimated cash-flows and other value to the society.

· Need for Expertise: Accurate valuations, as SEBI and IBBI emphasizes, are critical for the Techno-Economic Viability (TEV) studies required for projects worth ₹100 crore or more. In the previous cycle also, maximum manipulations happened in valuation of Lands, buildings, machinery etc. leading to poor recovery under liquidation. Poor valuations could lead to rejected loans or project failures. Hence, if the Credit markets have to evolve in India, their fundamental requirements of authentic and dependable financial data (Audited balance sheets/auditor reports) and more realistic valuations by Registered valuers must be met.

Conclusion

The RBI’s Project Finance Directions, 2025 are like a safety net for banks and a roadmap for project developers and. By ensuring careful lending, close monitoring, and quick fixes for problems, these rules aim to make big projects—like roads, factories, or housing—more successful while protecting banks from losses. They work hand-in-hand with IBBI, SEBI and NAFRA’s focus on clear valuations, better corporate governance and authentic financial reporting to build trust in India’s financial markets. While these rules might make it slightly harder to start projects, they pave the way for stronger, more reliable project financing, benefiting everyone from developers to investors in the long run. More than that, these rules will discourage unscrupulous promoters from floating projects with the ulterior motives of committing frauds through inflated valuations and fund diversions.