Blueprint for progress: RBI releases the next-gen project finance guidelines

A robust and well-defined regulatory framework on project finance is critical for the economic growth of a developing nation, which invests heavily in large-scale infrastructure projects to boost economic activity, create jobs and improve the overall quality of life of its citizens. The foregoing is equally applicable to India, where the regulator of the financial services, the Reserve Bank of India (“RBI”), has consistently identified the issues plaguing the financial sector and implemented reforms to simplify, yet strengthen the extant regulatory framework applicable to project finance.

In its bid to further address the risks and complexities involved in project financing, the RBI has recently issued the Reserve Bank of India (Project Finance) Directions, 2025 (“New Directions”) on June 19, 2025  which adopt a principle-based regime for resolution of stress in project finance exposures and is harmonized across specified regulated entities[1] (“REs”).

These New Directions are the culmination of an elaborate stakeholder consultation exercise led by the RBI on the draft guidelines on the prudential framework for projects under implementation published on May 3, 2024 (“Draft Guidelines”) pursuant to its ‘Statement on Developmental and Regulatory Policies’ on October 6, 2023.

In our view, this formal recognition of ‘Project Finance’ as a separate loan category allows for targeted regulations customized to the specific and complex characteristics of project financing, which was lacking in the generalized definition of ‘Project Loan’ under the Prudential Circular[2].

1. Effectiveness and Applicability

The New Directions will come into force with effect from October 1, 2025 (“Effective Date”) and will govern the project financing exposures[3] of REs, where financial closure[4] has not been achieved as on the Effective Date.

However, it is noteworthy that in the event of resolution of a fresh ‘credit event’[5] and/or ‘change in the material terms and conditions’ in the loan contract of projects which have achieved the financial closure as on the Effective Date (“Specified Events”), such projects would be governed by the conditions stipulated in the New Directions, subject to certain exceptions on resolution of stress.

A likely implication of this is that the pricing of existing project finance exposures may change from its current pricing in certain circumstances, as the altered provisioning requirements set out in the New Directions will apply even to the existing projects on the occurrence of any Specified Event(s).

2. Phases of Project Cycle

A three-tiered project lifecycle structure has been formalised in the New Directions – (1) Design Phase; (2) Construction Phase; and (3) Operational Phase. The commencement of commercial operations by the project on the day of the ‘Actual DCCO’ marks the beginning of the operational phase.

The definition of ‘Actual DCCO’[6] is adequately tailored to the requirements of infrastructure projects, such as in mining of minerals and supply of energy, where ‘COD’ related covenants (including commencement of principal repayment) are triggered only once the project achieves a minimum contracted capacity, and not as soon as the commercial operations are initiated.

3. Defined contours of ‘Stress’ in project

 The New Directions take one step forward in defining the contours of ‘stress’ in the project and expressly lay down the events which constitute ‘Credit Event’[7], which acts as a trigger for the lenders to initiate a collective resolution process.

Although the Prudential Circular acknowledges ‘that default with any lender is a lagging indicator of financial stress faced by the borrower and expects the lenders to initiate the process of implementing a resolution plan (RP) even before a default’, the New Directions move the regulatory framework from a reactive (primarily default-driven) to a more proactive and standardized approach.

4. Minimum Exposure of Individual Lenders

Pre-actual DCCO, the project financing exposures will remain subject to minimum exposure floors for individual lenders. An individual lender is required to have at least 10% of the aggregate exposure in an under-construction project, where aggregate exposure of all lenders is up to Rs. 1500 crores. If the aggregate exposure is more than Rs. 1500 crores, then the minimum exposure floor for an individual lender is 5% or Rs. 150 crores, whichever is higher.

This is likely to mitigate the risk where lenders with very small exposures might rely disproportionately on the due diligence and monitoring efforts of larger lenders without contributing proportionally.

5. Permitted DCCO Deferment

The New Directions simplify the erstwhile two-tiered structure for DCCO deferment to a single, longer and simplified ‘Permitted DCCO Deferment’ period that keeps the asset classified as ‘Standard’.

Consequently, the safeguard to avail a funding for cost-overrun is now permissible for up to 3 years of deferred DCCO for infrastructure projects and up to 2 years for non-infrastructure projects. This will provide increased flexibility and resilience for complex infrastructure projects, ultimately reducing the likelihood of early non-performing asset (NPA) classification and supporting project viability and completion.

The lenders have also been provided the flexibility to disburse funds to meet cost overruns, without first requiring the sponsors/promoters to bring in their share of funding in the cost overruns.

6. Key Changes in Documentation

1. Common Agreement

The New Directions require that all the lenders of a project finance exposure have a common agreement with the debtor, although different terms for each of the lender may be provided in the agreement, provided this is agreed by the debtor and all lenders of the project.

This newly introduced requirement will impact the flexibility hitherto available to the lenders in their documentation and facility structures, as multiple banking arrangements will now be less relevant for project financing exposures.

2. Disbursement Schedule

While the lenders have traditionally monitored the stage of completion of project and released funds in tranches, with each disbursement linked to completion of specific project milestones, the New Directions now require that this disbursement schedule vis-à-vis the stage of completion of project is included in the loan agreement itself.

The intent of this direction appears to minimize ambiguities and potential disputes regarding fund availability and to establish a clear understanding between the lender and borrower of fund flow based on project progress.

However, the practical outcome of this direction needs to be carefully examined. The lenders have conventionally preferred to retain discretion, to the extent permitted by their credit policies, by stipulating in the loan agreement that the disbursement of a loan will be proportionate to the progress of the project, as certified by the lenders’ technical adviser, or stipulated only an indicative disbursement schedule in the loan agreement.

This disbursement schedule in the loan agreement now may need to build in adequate buffer at each project milestone, as any additional fund(s) required for the project in the event of any unanticipated expenditure or advance(s) for procurement of additional equipment (including utilization of project funds for availing letter of credit or bank guarantee facilities) may necessitate an amendment in the disbursement schedule of the loan agreement.

3. All Approvals before Financial Closure

It is now a codified responsibility of the lenders to ensure that all applicable approvals/clearances for implementing/constructing the project are obtained before financial closure.

Financial Closure

‘Financial Closure’ or ‘Financial Close’ has been historically interpreted in the context of signing finance agreements and fulfilment of conditions precedent to initial availability of funds, as evidenced in the model concession agreements published by the Department of Economic Affairs[8] and the power purchase agreements executed in the regular course in our experience.

The New Directions may have incidentally introduced an element of ambiguity in this context, as a loan agreement is generally effective and binding on the parties on the date of its execution. Execution of a loan agreement, which is devoid of an overarching discretionary clause (providing a discretion to the lender to not disburse a loan for any reason whatsoever), may be considered to be legally binding on the lender, as a contention may be raised that the lender is obligated to disburse funds on satisfaction of conditions precedent by the borrower.

Approvals

An indicative list of approvals/licenses have been referred to in the New Directions, which includes environmental clearance, legal clearance, regulatory clearances, as applicable to the project. It is further clarified and illustrated in the directions that applicability of the approval/clearance would be guided by achievement of specific milestones in the project cycle.

While the intent of the regulation to de-risk project lending is laudable, it is critical for the borrowers and the lenders to examine the challenges associated with the multi-layered regulatory environment in India, coupled with inherent complexities in aspects such as land acquisition, for a timely financial closure.

For instance, Section 164 of the Electricity Act, 2003 allows the Central or the State Government to grant rights to a licensee for using private or public land for overhead transmission lines. The process involves filing an application and obtaining an approval from the relevant Government, which may take several months depending on the complexities of the project. In our experience, we have seen that at times, this approval is obtained closer to the DCCO, once a power project is about to commence commercial operations.

It remains to be seen on what parameters will the lenders now evaluate the applicability of consents/clearances to a specific milestone in the project cycle, particularly in cases where timelines for obtaining such consents/clearances are not expressly codified under Indian laws. In such cases, lenders may have to make this determination based on industry/market practice in this regard.

Obtaining environmental clearances may also require significant upfront investment in surveys, studies, and legal processes, which itself might need initial funding. Developers have traditionally proceeded with some calculated risk, aiming to secure the most critical and time-consuming clearances early.

4. Project Finance Database

A major compliance introduced by the New Directions requires that the lenders need to keep project specific data in the form prescribed under the directions, which are to be updated for any change in parameters of a project finance exposure within 15 days from such change.

This will not only enable a quick reaction from the lenders to adverse developments in connection with the project, but also provide them access to historical and real-time project data to conduct more robust credit appraisals for new project finance proposals.

5. Techno-Economic Viability (TEV) Study

For project finance transactions (under PPP model) with a specified exposure, lenders are required to conduct a TEV study to assess project viability in the event of any change in ‘Appointed Date’ by the concession granting authority.

Key Takeaways

The New Directions represent a significant departure from the previous framework under the Prudential Circular in several aspects. The introduction of a principle-based regime for stress resolution, rationalised approach to provisioning, enhanced reporting requirements, and a more structured framework for DCCO extensions are key changes that reflect a more nuanced and proactive regulatory approach to project finance.

Lenders and borrowers involved in project finance must carefully analyze the impact of these New Directions and comply with these new requirements to avoid being the subject of any regulatory actions or penalties.

Key takeaways of the New Directions:

• New Directions are primarily applicable to new project finance exposures, except in certain specified cases where existing projects may also be governed by the New Directions.
• While not expressly specified in the New Directions, refinancing of existing project financings will not be governed by the New Directions in our preliminary view.
• Lenders are advised to take note of the additional compliance in terms of facility and documentation structures, including addition of a disbursement schedule in the loan agreement, the need for a common agreement between all lenders and the consequent implication on multiple banking structures.
• The conditions mandating minimum land/right of way availability and all applicable clearances to be in place before financial closure may impact the funding timelines, and will lead to increased reliance by a lender on its technical advisers for a comprehensive due diligence.

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[1] The New Directions are applicable to all commercial banks, non-banking financial companies (NFBCs), primary (urban) cooperative banks and all India financial institutions (AIFs).

[2] Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated April 1, 2025 defines a ‘Project Loan’ as any term loan which has been extended for the purpose of setting up of an economic venture.

[3] An exposure will be qualified as a project finance exposure if: (i) the pre-dominant source of repayment as envisaged at the time of financial closure (i.e. at least 51%) must be from cash flows arising from the project which is being financed; and (ii) all the lenders have a common agreement with the debtor.

[4] Financial Closure is achieved when the capital structure of the project, including equity, debt, grant (if any), accounting for minimum 90% of the total project cost, becomes legally binding on all stakeholders.

[5] Credit Event is deemed to be triggered on the occurrence of any of the following: (i) Default with any lender; (ii) Any lender(s) determines a need for extension of the original/extended DCCO, as the case may be, of the project; (iii) Expiry of original/extended DCCO, as the case may be; (iv) Any lender(s) determines a need for infusion of additional debt; (v) The project is faced with financial difficulty as determined under the Prudential Framework.

[6] Actual DCCO has been defined as the date on which the project is put to commercial use and completion certificate/ provisional completion certificate/ occupancy certificate (in case of CRE and CRE-RH projects or its equivalent is issued to the concessionaire/project developer/promoter.

[7] ‘Credit Event’ is deemed to have triggered on the occurrence of any of the following: (i) Default with any lender, (ii) Determination by a lender of a need to extend the DCCO; (iii) Expiry of original/extended DCCO; (iv) Determination of a lender of requirement to infuse additional debt; (v); Determination of financial difficulty being faced by the project in accordance with the Prudential Circular.

[8] Available at https://www.pppinindia.gov.in/model_concession_agreement.