Indian companies are leaning more heavily on banks for financing as the cost of raising money through bonds has become less attractive, Jefferies said in a note that points to a notable shift in corporate funding behaviour. The move reflects a widening gap between bank lending rates and bond yields, with borrowers seeking cheaper and more flexible sources of capital at a time when market conditions have become less favourable for debt issuance.
Bank Credit Gains Ground
The trend marks a meaningful change in India's corporate funding mix. For much of the past several years, large companies and financial institutions had increasingly tapped the bond market, drawn by deepening investor demand and competitive pricing. That pattern is now showing signs of adjustment as bond borrowing costs rise, making bank loans comparatively more appealing for a broader set of borrowers.
Jefferies said demand from non-banking financial companies, wholesale trade, commercial real estate, power and chemicals has helped support stronger corporate lending by banks in recent months. These sectors are typically sensitive to funding costs and liquidity conditions, and their renewed appetite for bank credit suggests that loan growth is being driven not only by large industrial borrowers but also by more cyclical and working-capital-intensive businesses.
The shift is significant because it comes at a time when India's banking system has been working through a changing credit cycle. After a period in which deposit growth and loan growth were closely watched for balance-sheet strain, lenders are now seeing improved traction in corporate lending. That can support earnings and asset growth, but it also raises questions about how long the momentum can last if bond markets stabilise or if banks become more selective on pricing and risk.
Why Bonds Lost Appeal
Rising bond borrowing costs are at the centre of the change. When yields climb, companies that can access bank credit often find it more economical to borrow from lenders rather than issue debt in the market. The advantage is especially relevant for borrowers seeking medium-term financing, refinancing existing obligations or funding expansion without paying a premium to investors.
The bond market's relative weakness also reflects broader rate expectations and investor caution. As funding costs rise across the system, issuers must offer better returns to attract buyers, which can quickly erode the appeal of public debt issuance. For companies with strong banking relationships, the bank route can therefore become the path of least resistance.
This does not necessarily mean the bond market is losing relevance. Rather, it suggests that corporate treasurers are becoming more opportunistic, shifting between funding channels depending on pricing, tenor and market sentiment. In India's evolving credit landscape, that flexibility is increasingly important.
Sector Demand Broadens
The sectors supporting bank lending offer a useful window into the underlying economy. NBFCs often borrow to on-lend, making them important intermediaries in the credit system. Wholesale trade and commercial real estate tend to require substantial working capital or project financing. Power and chemicals, meanwhile, are capital-intensive industries where access to timely funding can materially affect operations and investment plans.
The breadth of demand indicates that the pickup in corporate lending is not confined to one isolated segment. Instead, it points to a wider search for liquidity across the economy, with banks emerging as the preferred channel for many borrowers. That can be read as a sign of confidence in the banking system's ability to absorb demand, but it also underscores how sensitive corporate financing remains to relative borrowing costs.
For policymakers and market participants, the development is worth watching closely. A sustained shift toward bank credit could support loan growth and help transmit monetary conditions more directly through the financial system. At the same time, it may reduce activity in the bond market if issuers continue to see bank loans as the cheaper option.
For now, Jefferies' assessment suggests that Indian banks are benefiting from a favourable turn in corporate borrowing patterns. Whether that becomes a durable trend will depend on the direction of interest rates, liquidity conditions and the pace at which bond-market pricing normalises.