The Reserve Bank of India’s revised project finance guidelines, effective from October, aim to mitigate infrastructure financing risks
and establish a robust framework to safeguard stakeholder interests, informs Rajashree Murkute.
India’s ambitions are vast: transforming into a $30 trillion economy by 2047, building 100 smart cities, and advancing sustainability alongside seamless connectivity. Yet these goals are constrained by a considerable infrastructure financing gap, which is over 5 per cent of GDP.
Despite a marked increase in public investment—central government spending more than doubled between FY2021 and FY2025—private capital remains largely suboptimal. Ironically, large institutional investors, such as insurance and pension funds, with access to substantial investible capital, allocate just 6 per cent to infrastructure, leaving banks to shoulder the bulk of funding.
Infrastructure Financing: Current Landscape
Based on estimates from the National Infrastructure Pipeline (NIP) and the Union Budget FY2025, India’s infrastructure financing requirement over FY2025-2030 is projected at approximately Rs.121 trillion. (Chart 1)
Assuming infrastructure investment grows at around 5-7 per cent annually, spending may accelerate post-2026, driven by major capital outlays in railways, renewable energy, and logistics. The public share, comprising central and state governments, is expected to remain close to 65-70 per cent, with the remainder allocated to private sector participation and public-private partnerships (PPPs).
A sector-wise breakdown of India’s infrastructure financing requirement from FY2025 to FY2030 (Chart 2), aggregating `121.5 trillion, indicates a pronounced emphasis on transportation and energy infrastructure, followed by urban development and other sectors.
Central Bank Intervention
The long gestation periods and high capital requirements of infrastructure projects deter traditional lenders, exacerbating India’s financing gap. To meet its ambitious infrastructure goals, greater participation from both the public and private sectors is essential. Without it, the country’s grand vision may fall short.
Over the past year, the Reserve Bank of India (RBI) has actively pursued this area, introducing several measures to facilitate project financing, particularly for infrastructure. Notable among these are the Partial Credit Enhancement (PCE) scheme, liquidity-boosting rate cuts, and, most recently, the finalised project finance guidelines following the draft issued in May 2024. Collectively, these interventions bode well for infrastructure financing and stakeholders.
Let us focus on the most recent measure: the ‘Reserve Bank of India (Project Finance) Directions, 2025’, effective from October 1, 2025. These directions aim to establish a harmonised, principle-based framework for financing both infrastructure and non-infrastructure projects, including commercial real estate (CRE) and commercial real estate-residential housing (CRE-RH), by regulated entities (REs).
Scope of Revised RBI Guidelines
The revised RBI framework introduces several key improvements that aim to balance prudence with practicality. One significant change is the relaxation of the six-month cap on the moratorium period post commencement of commercial operations. This allows greater flexibility in structuring debt amortisation schedules, particularly for availability-based infrastructure projects where revenue streams stabilise over time.
Provisioning norms have also undergone a notable recalibration. For projects under construction, the provisioning of 5 per cent proposed earlier has been pared down to a more reasonable 1-1.25 per cent of funded exposure. Furthermore, when the date of commencement of commercial operations (DCCO) is deferred, provisioning will now be applied gradually through a phased, quarterly increase—rather than an immediate 2.5 per cent charge—as previously proposed. This approach offers a more measured and practical response to project delays.
The operational phase carries differentiated provisioning requirements based on sectoral risk. For infrastructure projects, the provisioning remains unchanged at 0.4 per cent, providing much-needed stability to operational assets. However, exposures to commercial real estate and residential housing, which are viewed as carrying higher demand-side risks, face slightly elevated provisioning at 1 per cent and 0.75 per cent, respectively. Based on the current circular and earlier draft guidelines, it is also inferred that debt raised at the Infrastructure Investment Trust (InvIT) level remains outside the scope of these revised norms.
Addressing early credit risk, the framework introduces a structured resolution mechanism for defined credit events occurring during the construction phase. These events must be resolved within a prescribed timeframe, enforcing tighter monitoring and governance across stakeholders and lenders.
Another important revision pertains to the timing of land and right-of-way (RoW) requirements. Moving this from the pre-sanction to the pre-disbursement stage for both infrastructure and non-infrastructure projects is expected to reduce bottlenecks in financial closure and improve execution timelines. While mandating that all clearances be in place before financial closure might cause short-term delays, it is likely to improve predictability and stakeholder outcomes in the long run. Especially once authorities standardise timely approvals.
Finally, in a relief to ongoing projects, the RBI has excluded those achieving financial closure before October 1 2025, from the applicability of these revised guidelines. This addresses industry concerns about retrospective implementation that had surfaced during the draft stage.
Despite these positives, a few emerging concerns merit attention. A mandatory tail period of 15 per cent of the project’s economic life could reduce the leverage capacity by roughly 10 per cent, particularly for hybrid annuity model (HAM) projects with shorter concession durations. This may also curtail top-up loan potential across most infrastructure projects, except those with extended operating periods, such as renewable energy, transmission networks, and airports. For smart metering and newer infrastructure models, adopting InvIT-like structures may become essential to offset these limitations.
Another area of concern is the reduced flexibility in DCCO deferments. Capping the cumulative timeline at three years—down from four—could create hurdles for projects facing litigation-related delays. Without sufficient time buffers, affected exposures might face asset reclassification and heightened borrowing costs during execution. It is worth noting that this constraint does not apply to non-infrastructure projects such as CRE and CRE-RH, which retain their existing deferment provisions.
Lastly, the treatment of cost overruns linked to changes in scope (CoS) presents a new challenge. Projects with overruns under 25 per cent may now face stricter asset classification norms, potentially triggering credit events and increasing the financial burden on sponsors. Typically, sponsors absorb cost overruns unless supported by authorities or lenders, which remains case-specific. This new provision could prompt developers to adopt more cautious bidding strategies, especially in the absence of guaranteed gap-funding mechanisms or pre-approved contingency buffers.
The Way Forward
At the outset, the recent RBI guidelines on project finance appear far more balanced and pragmatic in addressing concerns related to infrastructure financing. Yet, the fine print alludes to a requirement from all stakeholders to adopt a more disciplined, cautious, and proactive approach when undertaking projects.
Developers have been advised to adopt a prudent bidding process with more in-built provisions for contingencies. They have been encouraged to undertake appropriate demand or volume forecasting studies, which will ease pressure on cash flow generation and refinancing-related risks. This can be done by exploring the transfer of eligible infrastructure assets to InvITs and REITs, thus enabling adequate release of capital for future project awards.
For regulated entities such as banks, non-banking finance companies (NBFCs), and All India Financial Institutions, the RBI has mandated that disbursement of project loans should occur only after the requisite right of way (RoW), clearances, and approvals are in place. This would also minimise any potential litigation risks arising from a delay in receiving necessary clearances, etc. Fast-tracking of the litigation and arbitration-related process is another important recommendation. Sustained improvement in this regard will attract more private players, investors and patient capital in the development phase. Finally, even during the operational phase, the timely release of contractual payouts to the concessionaire, abstaining from imposing frequent changes in the contracted terms, like exempting classified vehicles from toll payments, and the timely issuance of tariff orders are likely to minimise stress in cash flows.
Now for the guidelines’ most important part. The central bank seeks strict enforcement of the guidelines by regulated lending entities such as banks, non-banking finance companies (NBFCs) and all India financial institutions. The RBI mandates adequate capacity building by lenders towards the implementation of the revised guidelines, including expanded monitoring, compliance reporting, and appraisal capabilities. All lender parties must make cohesive and coordinated efforts for a common agreement and encourage better debt structuring and timely implementation of remedial actions. Interest rate benefits must be promptly transmitted to projects. Finally, aligning the debt tenure with the project life cycle, i.e., providing long-term infrastructure funding with additional focus on environmental, social and governance (ESG) norms-compliant lending.
Infrastructure development will continue to remain the mainstay among policymakers, financiers and investors. Therefore, the RBI’s special efforts in addressing the prevailing challenges are a massive step in the right direction. As the effective date gets close, the underlying intricacies regarding policy implementation are expected to be well-understood, accepted, and better prepared
by all stakeholders.
About the author:
Rajashree Murkute, Senior Director, CareEdge Ratings.
Key Demand Drivers
- Fiscal Accelerators
- FY2025 Boost from budget allocations and NIP projects
- FY2026 Growing capex, smart cities and green infrastructure
- FY2027 Freight corridors, EV infrastructure and solar expansion
- FY2028 High-speed rail, urban metro and logistics parks
- FY2029 Gati Shakti infra mission scaling
- FY2030 End of the seven-year infrastructure vision under NIP and Viksit Bharat initiatives
Source: National Infrastructure Pipeline