The Reserve Bank of India has released its final guidelines for project finance loans, significantly easing provisioning norms and sparking a rally in shares of public sector financial institutions engaged in infrastructure lending. The revised framework, which will take effect from October 1, 2025, is seen as a positive regulatory shift that reduces capital strain on lenders while aiming to streamline long-term project financing practices across the financial sector.
Under the new norms, provisioning requirements for under-construction projects have been revised downward from the earlier proposed 5 percent to 1.25 percent for commercial real estate (CRE), 1 percent for residential housing under CRE-RH, and 1 percent for other infrastructure projects. Once projects transition to operational status, provisions will further drop to 1 percent for CRE, 0.75 percent for CRE-RH, and 0.4 percent for other infrastructure loans. The reduced provisioning burdens aim to enhance profitability and capital efficiency for lenders, without significantly affecting their net worth. Any required adjustments can be made through impairment reserves, thereby preserving Tier 1 regulatory capital.
Following the announcement, shares of public sector undertakings such as REC, PFC, HUDCO, IRFC, and IREDA experienced sharp gains. REC and PFC led the rally with gains of 3 to 4.5 percent, while HUDCO, IRFC, and IREDA also saw their share prices rise by nearly 2 to 2.5 percent. Analysts from leading brokerage firms, including Jefferies, Citi, CLSA, and Motilal Oswal, noted that the updated regulations remove major overhangs and provide a conducive environment for financial institutions involved in long-gestation infrastructure and real estate projects.
The new norms also bring uniformity by replacing several older RBI circulars, making the regulations applicable to banks, non-banking financial companies (NBFCs), and cooperative banks. Importantly, the guidelines apply only to loans sanctioned from October 1, 2025, onwards, thus shielding the existing loan portfolios from abrupt regulatory changes.
Despite the positive momentum, some risks remain in the sector. Notably, PFC and IREDA are currently investigating a significant loan exposure of approximately ₹663 crore linked to Gensol Engineering and its subsidiary BluSmart. The companies face allegations of fund diversion and document forgery, as per SEBI filings. The total exposure to this case may reach ₹977 crore, and if irregularities are confirmed, lenders may need to make full provisioning, which could negatively impact their earnings in the short term.
The RBI’s finalized project finance norms have been well received by the market and financial analysts alike. They are expected to strengthen the infrastructure financing ecosystem by reducing regulatory friction and improving capital allocation. However, the sector must also remain vigilant regarding credit discipline and project-level transparency to sustain investor confidence and regulatory goodwill.