Experienced Financial Advisor Reason Powerful Project Finance Directions 2025

In June 2025, the Reserve Bank of India (RBI) notified (Project Finance) Directions 2025 for better regulation of project financing. Project advisory services in financial services welcome this prudential framework, beneficial to lenders, borrowers, and the broader economy. Industrial and infrastructure project funding is the lifeline of economic growth in India. However, project delays, cost overruns, and contractor default intensify the credit risk involved in financing large, long, and capital-intensive projects. New directions address the previous regulatory gaps in the project financing framework. The true impact on lenders, borrowers, and project viability will become evident when the guidelines take effect in October 2025.

Here, we discuss the salient features of the new directions, their rationale, and expected upsides.

What key changes do experienced project finance advisors see in the RBI’s (Project Finance) Directions 2025?

Let us decode the main provisions of the RBI’s new project finance guidelines.

Definition of project finance

Project finance is funding having 51% or more repayment from the project’s cash flows. Also, all the lenders are in a common agreement with the borrower.

While other collateral can give security, the primary security is the cash flow.

Date of Commencement of Commercial Operations (DCCO) types and related project phases

Project Finance experts explain the classification of DCCO as follows:

• Original DCCO: The date, projected at the time of financial closure, at which the commercial operations are expected to begin.
• Extended DCCO: If the original DCCO is delayed due to valid reasons like regulatory delays, then the term is called extended DCCO.
• Actual DCCO: The date on which operations begin and the completion certificate is issued.

Project phases are separated as:

• Design phase: Time period between conception of the project, designing, sorting clearances till financial closure.
• Construction phase: Time period from financial closure till the day before the actual DCCO
• Operational phase: Time period from actual DCCO to until full repayment of the project finance exposure.

According to experienced project finance advisors, project phase classification differentiates risks and compliance for each phase.

CRE and its sub-category, CRE-RH

A CRE (Commercial Real Estate) loan refers to debt that is repaid using income generated from commercial properties such as malls, offices, hotels, etc. CRE-RH loan is the subcategory of CRE loans where debt is given for residential property development. Commercial property, like schools, can only cover up to 10% of the total built-up area in the case of a CRE-RH loan

Provisioning requirements

Experienced financial professionals rejoiced at the RBI’s decision to reduce the provisioning requirement from 5%, as described in the draft directions, to 1.25% in the final guidelines. A 5% increase in provisioning status would have shrunk the lender's profit margins a lot.

Conditions of project finance

1. Preconditions Before First Disbursement

Lenders must confirm the following before releasing any funds:

• Financial Closure: Financial closure must be achieved, and both the original Date of Commencement of Commercial Operations (DCCO) and disbursement schedule must be clearly documented.
• Repayment Tenure: The repayment schedule should not exceed 85% of the project’s economic life, ensuring long-term viability.
• Critical Approvals: All necessary approvals must be obtained prior to financial closure, except those that are tied to specific project milestones.
• Land and Right-of-Way Requirements:

The new regulatory provisions may increase the burden on the lenders, but experienced project finance advisors believe the lender's business will become safer and smoother.

2. Lender Exposure Requirements

Minimum exposure thresholds are defined to ensure lender commitment and reduce fragmentation during the construction phase:

• For projects with total exposure up to ₹1,500 crore: each lender must hold at least 10%.
• For exposures above ₹1,500 crore: each lender must contribute the higher of 5% or ₹150 crore.

3. Additional Conditions for PPP Infrastructure Projects

For public-private partnership infrastructure projects:

• Disbursement can commence only after the appointed date or upon declaration of an equivalent
• If total exposure is ₹100 crore or more, this is subject to a fresh techno-economic viability (TEV) assessment and risk reassessment. Hiring a top financial analyst in project finance can provide lenders valuable insights into a project’s feasibility.

These measures reflect RBI’s intent to ensure stronger project viability, lender accountability, and reduced risk exposure across the sector.

Managing Stress, DCCO Extensions, and Cost Overruns

1. Stress Resolution Framework

• Proactive Monitoring: Lenders are expected to continuously monitor project progress and initiate timely resolution plans when stress is identified.
• Redefined Defaults: The concept of “default” has been replaced by a broader “credit event”, which serves as an early trigger for collective resolution efforts.
• Post Credit Event Obligations:
  1. Report the event to CRILC (Central Repository of Information on Large Credits).
  2. Notify all consortium lenders.
  3. Conduct a Debtor Account Review within 30 days (the “Review Period”).
  4. Act in accordance with the Prudential Framework.

Experienced project finance advisors consider that lenders can respond earlier, based on early warning signs and not only defaults. Broader credit events like delays in construction, cost overruns, weakened project viability, or financial ratio deterioration. It allows timely intervention and prevents escalation into major defaults.

2. DCCO Extensions

Projects can continue to be classified as ‘standard assets’ if DCCO extensions are:

• Within 3 years for infrastructure projects.
• Within 2 years for non-infrastructure projects.
• Incorporated as part of a resolution plan.

3. Cost Overruns and Standby Credit Facilities (SBCF)

• Up to 10% cost overruns resulting from DCCO extensions may be funded through an SBCF, which must be pre-approved at financial closure.
• If no SBCF was sanctioned or subsequently renewed:
• Additional funding may still be provided, but at a premium rate over what would have applied with an SBCF in place.
• Loan agreements must clearly state this premium and include provisions for upward revision based on actual risk assessment at the time of sanction.

4. Project Scope Changes

Projects will remain classified as ‘standard’ even after a cost increase due to a scope change if:

• The scope change leads to a minimum 25% increase in total project cost.
• Viability is reassessed and found acceptable.
• A revised credit rating is obtained, not more than one notch below the previous rating.

Under the current regulations, even routine delays—despite no real financial stress on the borrower—have resulted in adverse asset classifications. Project finance experts have welcomed the new regulations, which avoid downgrading asset classification unless there is material distress to project cash flows.

Data Governance and Compliance

• Maintain a digital record of all project finance exposures.
• Update records within 15 days whenever there is a significant change.
• Set up the required digital systems within three months from the effective date.
• Verify project progress through independent assessments conducted by certified engineers or architects.

What are the advantages of Project Finance Directions 2025, in the experience of project finance consultants?

• Early detection, especially in the project’s construction phase, and timely resolution of stressed assets.
• Prevention of downgrading the project’s classification even when the project delay is due to non-credit factors. This comes as a relief to borrowers whose assets were previously classified adversely, despite their projects showing no real cash flow concerns.
• There was no distinction in provisioning requirements during different project phases. With the new directions, provisioning norms take into account heightened risks during the construction phase. Project finance experts are confident that new guidelines will prevent loan defaults and protect lender’s interest.
• The mandatory 15% tail period gives comfort to the lender. In the event of a default or repayment delay at maturity, a residual period remains to recover outstanding dues from project cash flows.
• The risk sharing is balanced among lenders. All lenders will have the same DCCO and provisioning status.
• One of the key changes is the move from a binary ‘default’ model to a more refined ‘credit event’ trigger during the construction stage, allowing for earlier identification of financial stress.

Bottomline

The RBI's new Project Finance Directions 2025 mark a shift from a disjointed, product-specific credit model to a cohesive, risk-aligned structure tailored for project financing. This approach balances stricter responsibility for lenders with adaptive flexibility, incorporates early stress identification mechanisms and prevents delays in project implementation. Experienced project finance advisors are certain that these guidelines will improve investor and lender confidence in long-gestation infrastructure projects.