Moneycontrol Pro Panorama | A sigh of relief for banks

This should bring relief to banks, spark some joy in bank stocks, and give banking analysts fodder for their next research note.

Yes, I’m talking about the RBI’s partial U-turn on project finance provisioning norms. The Reserve Bank of India (RBI) has rolled out its final guidelines on project finance, effective October 1, 2025. These rules, which govern how banks and other lenders fund large infrastructure and real estate projects, are a significant climbdown from the stringent draft norms proposed in May 2024.

While the final guidelines still nudge lenders towards tighter risk management, they avoid the heavy-handed provisioning requirements that had the industry sweating.

Let’s break it down.

The draft guidelines had spooked lenders by demanding a hefty 5 percent provision, essentially a cash buffer, for loans on projects under construction. That’s a big jump from the current 0.4 percent standard, and it would’ve forced banks to lock away billions, potentially crimping their ability to lend.

The final rules, however, slash this to a more palatable 1 percent for most under-construction projects, with a slightly higher 1.25 percent for commercial real estate.

Once a project starts generating revenue, say a toll road collecting fees or a mall leasing shops—the provision drops to 0.4 percent or 0.75 percent, depending on the project type.

This tiered approach feels like a compromise: It acknowledges the risks of projects that are still just concrete and cranes, but doesn’t punish banks unduly once cash starts flowing.

Why is this a relief?

For one, the lower provisioning means banks won’t need to squirrel away as much capital upfront. That’s real money they can use to fund other loans, from small businesses to homebuyers.

A M Karthik, a senior analyst at ICRA, points out that the 1 percent provisioning for under-construction projects, while higher than today’s 0.4 percent, is far less crippling than the 5 percent proposed earlier.

For operational projects, sticking with the existing 0.4 percent is a clear win. Non-banking financial companies (NBFCs), which often fund riskier projects, also dodge a bullet since their current provisioning practices are already close to the new requirements.

Another smart move is the RBI’s decision to grandfather existing projects. Loans already on the books won’t face the new rules unless they’re restructured after October 2025. This avoids a chaotic scramble to rejig old deals and gives lenders a smoother transition.

The RBI also builds in flexibility for delays which is a common headache in project finance. If a project’s commercial start date slips, provisions creep up by 0.375 percent or 0.5625 percent per quarter, depending on the sector. It’s a nudge to keep projects on track without immediately branding them as bad loans.

But it’s not all rosy.

The final guidelines still demand more discipline than the status quo. That 1 percent provision, though lower than 5 percent, is more than double what banks set aside now.

For mega projects with billion-rupee loans, this could still pinch profits. The RBI is also tightening the screws on monitoring, requiring lenders to track project progress closely and report hiccups promptly.

This could stretch smaller banks with lean teams, though it’s hard to argue against better oversight after years of bad loans haunting the sector.

Now, you might tell me to forget the jargon and explain why these matters for the average person.

Well, big projects such as highways, power plants, or new malls could create jobs and boost the economy. If banks are too scared to lend because of harsh rules, those projects stall, and so does growth.

But if the rules are too lax, banks could end up with another pile of dud loans, like the ones that crippled them a decade ago. The RBI’s final guidelines feel like a middle path: tough enough to keep lenders honest but practical enough to keep the money flowing.

Critics might say the RBI caved in to industry pressure, watering down the draft to appease bankers. Others could argue it’s still too strict, especially for a country hungry for infrastructure. Before I conclude—Don’t miss this interesting chart-based story on how Fed rate hikes have influenced RBI policies over the last 10 years and Vatsala Kamat’s thought-provoking question—Are cracks emerging in the local residential property market.

Until next time!

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Dinesh Unnikrishnan Moneycontrol Pro