RBI Proposes New Guidelines for Lending to Projects Under Development

 In a proactive move to strengthen the regulatory framework governing lending practices to projects under development, the Reserve Bank of India (RBI) has unveiled a comprehensive set of guidelines. The central bank's draft directives introduce a systematic classification of projects based on their respective phases, accompanied by a significant increase in provisioning, reaching up to 5 percent during the construction stage, notwithstanding the standard asset status.

Phased Implementation of Provisioning Requirements

The draft regulations propose a phased implementation for the 5% standard provision requirements for loans in the construction phase, providing a structured approach towards compliance:

• 2% Provision: Effective from March 2025, the provisioning requirement will begin at 2%, spread over the four quarters of FY25.
• 3.5% Provision: Starting from March 2026, the provision will increase to 3.5%, spread over the four quarters of FY26.
• 5% Provision: By March 2027, the provision will reach 5%, also distributed over the four quarters of FY27.

Transition to Operational Phase

Upon transitioning into the operational phase, provisions may be scaled down to 2.5 percent of the funded outstanding, further reducing to 1 percent subject to specific conditions being met.

These conditions include:

• The project demonstrating a positive net operating cash flow capable of servicing repayment obligations to all lenders.
• A requisite reduction of at least 20 percent in the total long-term debt of the project with lenders from the outstanding amount at the Date of Commencement of Commercial Operations.

The introduction of these guidelines reflects the RBI's commitment to ensuring the stability and resilience of the banking sector, particularly in the context of lending to projects under development. By implementing a phased approach and incorporating conditions for scaling down provisions, the RBI aims to strike a balance between prudential norms and the facilitation of project financing. These measures are expected to enhance risk management practices and promote the sustainable development of infrastructure projects in India.