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Project Finance: Provisioning requirement to increase but much lower than in the draft

No retrospective application; lenders likely to pass on higher provisions to borrowers

* The RBI announced the final guidelines on project finance after incorporating feedback from various stakeholders, including banks, NBFCs, industry associations and the Central government. The final guidelines are significantly milder than the draft, particularly in respect to provisioning requirements for under-construction project loans.

* Positively for the lending institutions, these guidelines are not applicable retrospectively and will not apply to under-construction projects, where financial closure has already been achieved. Such projects will continue to be guided by the extant provisioning norms to facilitate a seamless implementation. The revised project finance guidelines will be applicable to project loans sanctioned on or after 1st Oct’25.

* The final guidelines significantly ease the provisioning requirements on standard assets, which were proposed up to 5% in the draft guidelines. Under the final guidelines, NBFCs would need to make standard asset provisioning of ~1% for under-construction project finance (including infrastructure and CRE-RH) and 1.25% for under-construction commercial real estate (CRE) projects. Subsequently, in the operational phase (after commencement of repayment of interest and principal), standard asset provisioning will reduce to 0.4% for project finance, 0.75% for CRE-RH, and 1% for CRE projects.

* In our NBFC coverage universe, PFC and REC have the highest proportion of project loans. In our view, all loans given by PFC and REC would be categorized under project finance, except for the ones given to discoms (under various schemes like RDSS, RBPF and others). Loans given to discoms should be excluded from the purview of these guidelines. While these revised guidelines are not retrospective and will apply only to project loans sanctioned after 1st Oct’25, both PFC and REC carry adequate standard asset provisions, with Stage 1 and Stage 2 PCR at 1.13% and 0.95%, respectively, as of Mar’25 (refer Exhibit 1).

* Other NBFCs/HFCs that have a presence in the wholesale/corporate segment (including exposure to CRE and/or CRE-RH) include HFCs like Bajaj Housing, LICHF, PNBHF and Aditya Birla Housing Finance and diversified multi-product NBFCs like Piramal Enterprises, Aditya Birla Finance, L&T Finance and IIFL Finance. We have presented the mix of project finance for these NBFCs/HFCs in Exhibit 2. While disclosures about their current standard asset provisioning on various project finance sub-segments are not available for every lender, we believe that the standard asset provisioning requirements will increase from Oct’25 onward, which the lenders will likely pass on to borrowers.

Major highlights from the project finance guidelines

* Adoption of a principle-based (judgement based) regime for the resolution of stress in project finance exposures and harmonized across REs.

* Rationalization of permissible ‘date of commencement of commercial operations’ (DCCO) extensions with an overall ceiling: a) Infrastructure projects: up to three-year delay allowed, b) Non-infra projects: up to two-year delay allowed.

* Flexibility for REs in extending the DCCO within the above ceilings, based on their commercial assessments.

* Rationalization of standard asset provisioning requirements for projects under construction, with a) 1% for standard under-construction projects, b) gradual increase in provisioning for each quarter of delay in DCCO, and c) 1.25% for under-construction CRE.

* For accounts that have availed DCCO deferment under these guidelines and are classified as ‘standard’, lenders are required to maintain additional specific provisions of 0.375% per quarter of deferment for infrastructure project loans, and 0.5625% per quarter for non-infrastructure project loans (including CRE and CRE-RH). These provisions are to be maintained over and above the applicable standard asset provisioning requirements. These additional specific provisions shall be reversed upon the commencement of commercial operations.

View: Positive for lenders such as PFC/REC

* We believe that this is a positive development for PFC and REC, as the final guidelines are significantly milder than the draft guidelines, which had proposed a 5% provision on all under-construction projects. More importantly, these guidelines do not prescribe retrospective application to projects that have already reached financial closure.

* Overall, these guidelines are not disruptive in nature and should not have any significant impact on NBFCs/HFCs that have a presence in project finance. A part of this minor increase (if any) in standard asset provisions from Oct’25 onward can be passed on to borrowers, and the remaining will have to be absorbed by the lenders, which could have a minor impact on profitability.

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