Blitz Bureau
Stocks of public sector banks were rallying last week after the Reserve Bank of India (RBI) issued its final guidelines on project finance loans. The new rules, which will come into effect from October 1, 2025, require a general provision of 1.25 per cent on commercial real estate (CRE), and 1 per cent each on commercial real estate-residential housing (CRE-RH) and another portfolio during the construction phase.
After commencement of repayment of interest and principal, banks have to maintain 1 per cent general provisions on commercial real estate projects during the operational phase, and 0.75 per cent on residential housing (CRE-RH), while 0.40 per cent on all other projects, the central bank said.
The final directions are softer than those in the draft norms released in May 2025. The draft proposal suggested 5 per cent standard assets provisioning for under-construction projects. The final regulations give lenders significant relief.
According to new norms, under-construction projects carry a 1 per cent standard asset provisioning, compared with the 5 per cent requirement proposed in the draft norms. The standard provisions shall increase for each quarter of deferment of the date of commencement of commercial operations. The requirements for under-construction CRE exposures will be marginally higher at 1.25 per cent.
In addition, the requirement of specific provisions on DCCO (Date of Commencement of Commercial Operations) deferred standard assets is cut to a time-based rate of 0.4-0.6 per cent per quarter from a flat rate of 2.5 per cent.
According to RBI guidelines, for accounts which have availed DCCO deferment and are classified as ‘standard’, lenders shall maintain additional specific provisions of 0.375 per cent for infrastructure project loans and 0.5625 per cent for non-infrastructure project loans.
Brokerage views
“We believe the impact of the revised norms on bank / NBFC profitability will be negligible, as the existing book remains unaffected. For new project loans, any incremental provisioning cost is likely to be passed on to borrowers, especially in a declining rate environment, through yield adjustments,” the brokerage said.
The brokerage added that the key positive in the final norms is that they apply only to new and upcoming project loans. Existing exposures will continue to follow the current prudential provisioning framework, ensuring there is no disruption to the back-book.
Echoing similar views, analysts at Kotak Institutional Equities expect a lower impact from these guidelines compared to the impact from a draft set of guidelines because the incremental provision requirement has been curtailed. The requirement of standard asset provisions for assets under construction is cut from 5 per cent to 1 per cent.
“We see this relaxation as yet another step by the regulator toward systemic easing (after the recent relaxations on liquidity, interest rates, PSL, microfinance risk weight and LCR). The headwinds for loan growth are stemming from quality and cost of deposits (LCR compatible deposits), the trade-off between growth and NIM contraction and weak demand for credit from various segments of the economy,” the brokerage said.
In its report, the brokerage added that it has not seen a reversal in stance from lenders that had tightened their credit filters in retail in the past two years, while they have turned a bit more cautious today on SMEs looking at global factors.