New charter for long-gestation infra lending

When RBI introduced the Project Finance Directions last month, it quietly rewrote the playbook that has governed long-term project lending for over two decades. Effective 1 October 2025, the Directions replace a patchwork of circulars dating back to 2002, with a single, principle-based framework that will apply uniformly to commercial banks, non-banking financial companies (including housing finance companies), primary (urban) co-operative banks and all-India financial institutions.

At its core, the Directions does four things. First, it harmonises the treatment of stress in project finance with the broader Prudential Framework for Resolution of Stressed Assets, substituting the conventional trigger of “default” with the more forward-looking “credit event.” A credit event now includes any need to extend the Date of Commencement of Commercial Operations (DCCO), infusion of additional debt, or evidence of financial difficulty, pushing banks to act well before a payment is missed.

Second, it rationalises DCCO extensions. Infrastructure projects are allowed a deferment of three years, while non-infrastructure projects (including commercial real estate (CRE)) are capped at two. Within those ceilings, individual lenders retain flexibility to grant extensions based on commercial judgment.

Third, it recalibrates provisioning. Standard provisioning during construction is pared to 1 percent for most projects and 1.25 percent for CRE. Once a project enters commercial operation, the requirement falls to 0.40 percent for non-CRE exposures and 0.75 percent for CRE-residential housing – materially below prevailing norms. However, where DCCO is deferred within the permitted window, incremental provisioning must be provided for every quarter of delay, creating a graded cost of time overruns.

Fourth, the Directions impose tighter risk-management architecture: mandatory techno-economic viability studies for deals above ₹100 crore, project-specific databases updated within 15 days of any change, and a requirement that land acquisition milestones and statutory clearances be substantially complete before the first rupee is disbursed. Also significant is the 10 percent (or 5 percent/ ₹150 crore for larger deals) minimum exposure rule. By forcing each lender to keep meaningful skin in the game until commercial operation, the RBI hopes to cut the “free-rider” problem that has plagued large consortia, when marginal participants had little incentive to monitor progress.

For lenders, the most immediate benefit is capital relief in projects reaching their operational phase. A bank financing a 10-year toll road that starts earning cash flows in year five will now hold 60 basis points less in standard provisions through the operational phase. While the actual impact of this is yet to be analysed by the credit teams of the lenders, this certainly will lead to freed up capital which can be redeployed on account of provisioning reductions during operations. That said, the requirement that at least 50 percent of right-of-way be available for PPP projects before disbursement could slow financial closure in states where land aggregation remains fraught.

Borrowers, meanwhile, gain predictability. The ceiling on DCCO deferments is explicit, the additional provision for delays is formula-driven, and the definition of “change in scope” (a 25 percent rise in outlay) is numerical rather than subjective. Also noteworthy is the formal recognition of standby credit facilities (SBCF). If sanctioned at financial closure and renewed without break, SBCF drawdowns up to 10 percent of project cost will not disturb asset classification – a long-standing demand from concessionaires fearful of last-mile cost spikes.

Taken together, the directions underline the RBI’s shift from prescriptive rule-making to outcome-based supervision. By aligning project finance with the mainstream stressed-asset framework yet preserving sector specific safeguards, the central bank is signalling that infrastructure is systemically important but not exempt from credit discipline. The Directions also dovetail with the government’s infrastructure push, the National Infrastructure Pipeline and Asset Monetisation Pipeline, where timely completion is critical to investment recycling.

If executed well, the Directions could mark a turning point: encouraging fresh capital into infrastructure while reducing the probability of the next big NPA cycle. But the evidence will lie in everyday practice - how diligently lenders capture data, how quickly they act at the first sign of stress, and how firmly they balance commercial judgment with regulatory discipline. For now, the RBI has laid down an ambitious, and arguably long-overdue, roadmap. It is up to the market to drive on it.

Views are personal. Anurag Dwivedi is a Partner and Shashwat Bhaskar is a Senior Associate at Shardul Amarchand Mangaldas & Co.