RBI, by way of a Press Release dated May 03, 2024, has published a draft of the Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances-Projects Under Implementation, Directions, 2024 (‘Draft Directions’). The Draft Directions govern the financing of projects in infrastructure, non-infrastructure and commercial real estate sectors by lenders (as more particularly identified under the Draft Directions). As per the revised framework, lenders are required to have board approved policies in place for resolution of the stress in project finance exposures and must ensure that disbursal under such cases is proportionate to the stages of completion of the project.

The Draft Directions specify prudential conditions for project finance, which necessitate that all mandatory pre-requisites should be in place before the financial closure of a project. An indicative list of such pre-requisites includes availability of encumbrance free land and/or right of way, environmental clearance, legal clearance, regulatory clearances, etc. As per the Draft Directions, a positive Net Present Value (‘NPV’) is a prerequisite for any lender financed project. Further, any diminution in NPV during the construction phase, which may lead to credit impairment, will be construed as a credit event, and lenders must independently re-evaluate the project NPV every year. Accordingly, the Draft Directions require lenders to monitor the build-up of stress in a project on an ongoing basis and initiate a resolution plan well in advance.

The Draft Directions have also prescribed resolution and prudential norms governing project finance exposures, and also revised regulatory norms pertaining to deferment of the date of commencement of commercial operation (‘DCCO’) based on the nature of risk identified in the exposure. The Draft Directions also set out revised provisioning and income recognition norms for project finance exposures. Lenders are required to maintain a provision of five percent of the funded outstanding on all existing as well as fresh exposure on a portfolio basis during the construction phase of the project, which will be adjusted based on different stages of the project.

The RBI has prescribed a timeline for phased implementation of the mandatory five percent provisioning for standard assets during the construction phase. However, other norms and directives as set out under the Draft Directions will become applicable with immediate effect upon implementation.