IGI Logo

RBI finalizes project financing norms: Regulatory stance remains conducive to sector growth

Softened provisioning norms; broader impact appears limited

* The RBI has issued its final directions on Project Financing (2025), replacing multiple legacy circulars and aligning norms across banks, NBFCs, and co-operative banks. The new guidelines simplify and standardize the treatment of project loans across sectors.

* While the 2024 draft norms had proposed stringent provisioning (up to 5%) and upgrade rules (360-day performance requirement), the final guidelines significantly relax these provisions, resulting in minimal impact on banks’ profitability and balance sheets.

* A key positive in the final norms is that they apply only to new and upcoming project loans. Existing exposures will continue to follow the current prudential provisioning framework, ensuring there is no disruption to the back-book.

* We believe the impact of the revised norms on bank/NBFC profitability will be negligible, as the existing book remains unaffected. For new project loans, any incremental provisioning cost is likely to be passed on to borrowers, especially in a declining rate environment, through yield adjustments.

* To enable a smooth operational shift, the RBI has provided adequate lead time, with the revised norms set to take effect from 1st Oct’25.

* Top picks: ICICIBC, HDFCB, SBIN, AUBANK, and Federal Bank

Final project finance norms: A relief for banks and NBFCs

* The RBI’s final project finance guidelines are a positive for banks and NBFCs, especially when compared to the stricter 2024 draft. The most notable relief comes from the significantly eased provisioning requirements—cut to just 1% during construction (vs 5% proposed earlier) and as low as 0.4% post-DCCO.

* This reduces capital drag while still maintaining prudence. Overall, the final norms strike a balanced approach, enabling continued flow of project finance with minimal impact on the profitability or balance sheet strength of lenders.

Minimal impact on banks; borrowing cost may increase slightly as lenders pass on the hit from increased provisioning

* While the final norms introduce some incremental provisioning, the impact on banks’ profitability is likely to be minimal.

* Given the ongoing rate cut cycle, banks will have enough pricing flexibility to pass on the marginal cost to borrowers through slightly higher spread

* With funding conditions easing and lending appetite remaining intact, the revised norms are unlikely to meaningfully dent profitability. In fact, the accommodative rate environment provides a supportive backdrop, allowing banks to absorb any residual impact smoothly while continuing to support project finance growth.

Regulatory environment supportive; maintain positive view on the sector

The final project finance norms come as part of a broader wave of supportive regulatory measures aimed at sustaining momentum in the banking sector. Alongside repo rate cuts, liquidity-boosting operations, and deferrals of ECL and earlier project finance proposals, the RBI has now introduced a relaxed project financing framework that eases capital strain and encourages lending. The rollback of draft provisioning guidelines and the shift to principle-based supervision reflect regulatory pragmatism. We maintain our positive view on the sector, with ICICIBC, HDFCB, SBIN, AUBANK, and FB being our preferred picks.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412