New Delhi: Banks are working towards a common framework for project finance lending to curb regulatory arbitrage and operational misalignment among consortium lenders, people familiar with the development said.
The common parameters could cover aspects such as capital outlay, amount funded and gestation period, they said.
“There is a need for some common framework so that not all loans are covered under project finance, which can lead to conflicting loan classifications among consortium lenders,” said a bank executive aware of the developments.
State-run lenders and private banks are expected to hold discussions to arrive at common parameters. “A common framework will also bring in risk mitigation and avoid issues such as divergent audit observations,” said another bank executive, requesting anonymity. Project finance is funding for a project in which the revenues generated by the project serve as the primary security for the loan and also as a source of repayment.
The Reserve Bank of India has left the decision on the parameters to individual bank boards, allowing them to determine whether a loan can be underwritten as project finance.
“Therefore, it is necessary that the industry be aligned,” the executive said.
Under RBI guidelines, a lender has to ensure that loan disbursal is proportionate to the stages of completion of the project, as well as to progress in equity infusion and other sources of finance agreed as part of financial closure and receipt of remaining applicable clearances.
“We will be looking to address these issues, so that final guidelines by all bank boards are aligned, and reduce scope for any regulatory arbitrage,” the executive said.
According to RBI, project finance may take the form of financing the construction of a new capital installation (greenfield) or financing an improvement or enhancement in an existing installation (brownfield).
In the final guidelines effective October 2025, RBI rationalised the standard asset provisioning requirement to 1% for projects under construction. The requirement for under-construction commercial real estate, or CRE, exposures was pegged at 1.25%.
The guidelines mandate that all lenders should have a common agreement with the debtor, but allow different loan terms for each lender, provided these are agreed upon by the debtor and all lenders for the project.
