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Rbi Project Finance Directions, 2025 (“Pf Directions”) - Implications For Loan Documentation

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On 19 June 2025, the RBI issued the Project Finance Directions, 2025, (“PF Directions”) which came into force on October 1, 2025. The said PF Directions apply to project‑finance exposures of regulated entities (“Lenders”) defined to include:

  • All commercial banks (including small finance banks but excluding payment banks, local area banks and regional rural banks).
  • All NBFCs including housing finance companies.
  • All primary (urban) cooperative banks.
  • All India Financial Institutions (AIFIs).

The Directions do not apply to projects where financial closure has already been achieved as on the effective date (i.e. October 1, 2025). Those continue under the existing prudential guidelines on project finance. However, any resolution of a fresh credit event and/or change in material terms after the aforesaid effective date in those projects brings them under the said PF Directions.

From a Lender’s perspective, the PF Directions calls for an update to the loan-and-security documentation, monitoring mechanisms and covenant frameworks. Key implications inter alia include:

Incorporation of phase-based definitions: Loan agreements should clearly define the project phases (design (if applicable), construction and operational) and incorporate the definitions of ‘financial closure’ and ‘date of commencement of commercial operations (DCCO)’. In addition, the disbursement schedule should be project-specific and aligned with the stage of completion and repayment tenor (including the moratorium period), should not exceed 85% of the economic life of the project. Furthermore, the original, extended or actual DCCO, as applicable, shall be uniform across all lenders financing the project.

Pre-disbursement conditions and milestone-linked mechanics: Loan documentation must include covenants requiring all applicable approvals/clearances to be in place before financial closure and approvals/clearances which are contingent upon achievement of certain milestones in terms of project completion would be deemed to be applicable only when such milestones are achieved. Further, Lenders should ensure minimum land/right-of-way availability (50%: for PPP infrastructure; 75%: for other projects; and as may be decided by a lender: for transmission line projects) before disbursement of funds. Disbursements must be proportionate to stages of completion of project (backed by lenders independent engineer/architect certification) and equity infusion/other sources of finance agreed as part of financial closure.

DCCO-extension ceilings and provisioning triggers: Loan documents must provide contractual mechanisms for DCCO extensions (capped at 3 years for infrastructure projects, 2 years for non-infrastructure projects).

Transitional considerations: Projects with financial closure achieved by October 1, 2025 remain governed by the prior guidelines unless a fresh credit event or material change occurs post-effective date. Accordingly, the Lenders must clearly state in the loan documentation that the Project is governed under the prior prudential regime by virtue of having achieved financial closure as on the effective date; and stipulate that any subsequent fresh credit event or change in material terms will bring the Project within the ambit of the PF Directions, 2025.

For Lenders, it is imperative to revisit and revise standard documentation now and ensure that definitions, pre-disbursement conditions, exposure thresholds, milestone-certification mechanics, DCCO-extension frameworks, monitoring/reporting obligations and inter-creditor governance reflect the new regime. Early alignment will enhance enforceability, reduce ambiguity, strengthen governance and mitigate incremental risk in project-finance portfolios.