Key Highlights
- Provisioning for under‑construction project finance loans reduced to 1% from a previously floated 5%.
- Commercial real‑estate exposure now demands 1.25% provisioning during construction and 1% during operation.
- Operational phase provisions: 1% for CRE, 0.75% for CRE‑Residential Housing, and 0.40% for other projects.
- Norms take effect from 1 October 2025 while ongoing projects remain on the earlier regime.
- RBI’s revision aims to sustain credit flow for infrastructure and real‑estate while preserving risk discipline.
Detailed Insights
The Reserve Bank of India (RBI) released its final version of the project‑finance provisioning norms, setting the requirement for under‑construction loans at a modest 1%—a stark drop from the 5% the draft had envisaged. This move is part of Governor Sanjay Malhotra’s consultative agenda to ease credit availability for sectors deemed pivotal to growth.
For the commercial real‑estate (CRE) segment the RBI clarifies that during the construction phase a 1.25% provisioning must be maintained, while in the operational phase the bank may adopt a 1% rate. Provisions have been further differentiated for residential housing under CRE and for other project exposures, where 0.75% and 0.40% respectively will apply once the project is functional.
These revisions will be enforced from 1 October 2025; projects that are already underway will continue to follow the pre‑existing norms to avoid disruptive transitions.
RBI’s overarching goal is two‑fold: to shield the financial system from potential losses through prudent risk management and at the same time to eliminate the bottleneck that tighter provisioning had placed on infrastructure and real‑estate development.
Senior vice‑president A.M. Karthik of ICRA welcomed the change, noting that the final guidelines bring the provisioning for under‑construction projects down from 5% to 1%, thereby easing liquidity pressures on lenders while maintaining a reasonable safety cushion.
The background to this decision stems from the May 2024 draft norms, which had raised provisioning levels to tighten credit discipline. Industry bodies voiced concerns about the impact on liquidity and credit availability, prompting RBI to devise a balanced approach.
Key Concepts
- Provisioning for Project Finance Loans: the percentage of loan amount set aside by banks to cover expected credit losses on projects that are still under construction.
- Commercial Real‑Estate (CRE) Exposure: the segment of bank lending that deals with non‑residential property such as office towers, retail complexes, and industrial parks.
- Operational Phase Provisions: the provisioning requirements that apply once a project transitions from the construction stage to full operation and revenue generation.
- RBI Governance Approach: the consultative and accommodative policy style adopted by the Reserve Bank under its current leadership to balance financial stability with growth imperatives.