RBI project financing norms: MOFSL, Kotak and ICRA weigh in

The Reserve Bank of India (RBI) has released its final directions on Project Financing (2025), replacing multiple legacy circulars to standardise project loan treatments across financial institutions. The new guidelines introduce a simplified approach, specifically addressing future project loans, while existing exposures remain under the current framework to avoid disruptions.

MOFSL provided an optimistic view, stating that "We believe the impact of the revised norms on bank/NBFC profitability will be negligible, as the existing book remains unaffected." The revised norms take effect from 1st October 2025, offering sufficient lead time for adjustment.

The new norms apply only to new and upcoming project loans, keeping existing provisions unchanged for operational projects. ICRA's Senior Vice President, A M Karthik, noted that the final guidelines "come as a relief to the lenders, as for operational projects the extant requirement continues at 0.4%, which is lower than 1%/2.5% indicated in the earlier draft."

Analysts highlight that while changes are minimal for existing books, the easing of provisioning rules marks a positive regulatory shift. MOFSL maintains a positive outlook on the sector with banks like ICICI Bank, HDFC Bank, State Bank of India, AU Bank, and Federal Bank being preferred picks.

Kotak's perspective adds that the relaxation aligns with recent systemic easing measures by the RBI, noting that "Overall, we see this relaxation as yet another step by the regulator toward systemic easing." However, Kotak also pointed out ongoing challenges for loan growth, particularly due to the quality and cost of deposits.

The adjustments in provisioning for new project finance are expected to be absorbed by borrowers over time, as the cost could be shifted through yield adjustments.

ICRA's evaluation suggests limited impact on NBFCs, as sufficient provisions are already in place. "Limited impact expected on NBFCs as sufficient provisions are provided as per the expected credit loss assessment," Karthik indicated.

Overall, the regulatory adjustments are anticipated to support ongoing sector growth, while maintaining a stable footing for existing projects. The strategic easing in norms is expected to foster a conducive environment for future lending, with experts like MOFSL and ICRA envisioning a smooth transition into the new regulatory framework by October 2025.

The financial sector is advised to prepare for these changes, ensuring operational procedures are aligned with the new guidelines. The RBI's decision reflects a balanced approach towards sustaining growth and managing financial risks in the evolving market landscape.