RBI's Project Finance Guidelines: Balancing Risk and Growth, Says Moody's

The Reserve Bank of India (RBI) has released final guidelines for project finance loans, a move deemed credit-positive by Moody's Ratings. The guidelines are designed to manage risks while supporting project viability. Moody's noted on Monday that these guidelines are not expected to significantly impact system-wide profitability immediately, as they apply only to projects without financial closure by October 1, 2025.

Moreover, the global rating agency specified that the additional provisions, ranging from 25 to 60 basis points, are specific to project loans. In contrast, other types of loans, such as term or working capital loans in the infrastructure and commercial real estate (CRE) sectors, remain unaffected. The final guidelines, issued on June 19, do not impose higher provisioning on existing projects, reversing the draft guidelines proposed in May 2024.

Moody's anticipates that lenders with substantial exposure to the infrastructure sector—primarily public sector banks and infrastructure-focused non-bank finance companies (NBFC-IFCs)—could experience a slight negative impact on profitability from ongoing loan applications failing to achieve financial closure by the stipulated date. However, this is expected to be a temporary effect, according to Moody's. The revised guidelines reduce the provisioning on standard assets in the construction phase to 1.0-1.25 percent from an earlier draft of 5 percent, a change that alleviates concerns about prohibitive costs. Moody's forecasts that lenders will likely pass on these costs through increased lending rates for subsequent new projects, thus minimizing impacts on profitability while stabilizing the project financing environment for future growth.

(With inputs from agencies.)