RBI's Project Financing Norms

The Reserve Bank of India (RBI) has postponed the implementation of new project financing norms until at least March 31, 2026. This delay allows for further stakeholder consultation and the solicitation of fresh suggestions over the next three months, influenced by changes in the global financial situation.

Background and Objectives

• In May 2024, the RBI released a draft detailing a prudential framework for project loan financing.
• The primary aim is to strengthen the regulatory framework and harmonize norms across various financial entities, including banks, financial institutions, and non-banking financial companies (NBFCs).

Key Proposals

• Provisioning Requirement
  • 5% of the total project exposure to be set aside during the construction phase.
  • Once operational, and cash flows start, reduce to 2.5%.
  • Further reduction to 1% if cash flows cover all repayment obligations and long-term debt decreases.
• Moratorium Period
  • A uniform six-month moratorium period was proposed, which some bankers deem impractical due to varying project requirements.

Concerns and Suggestions

• Banks are concerned about profit impacts, preferring an initial allocation of 1-2%, an increase from the current 0.4% requirement.
• The RBI is reviewing submitted feedback, with a phased implementation period for any significant changes.
• Some flexibility might be expected in existing project finance norms to prevent jeopardizing project viability.
• Industry seeks relaxation on the positive Net Present Value (NPV) requirement, suggesting provisioning reversal if NPV turns positive later.