Whalesbook
Corporate Lending Reset: India's Big Borrowers Shift Strategy
The corporate banking landscape in India is bracing for a significant transformation by 2026, marked by a pronounced shift away from traditional bank loans by major corporations. These large borrowers are increasingly turning to equity and bond markets for their fundraising needs, driven by robust balance sheets and easier access to capital. This strategic pivot has led to a slowdown in corporate bank credit growth for big firms.
The Core Issue
Over recent years, corporate bank credit has lagged as a preferred funding source for large companies. The momentum has instead shifted towards mid-sized firms and supply-chain-linked enterprises. Banks, however, have observed a revival in corporate credit starting from the July-September quarter, showing sequential growth across major financial institutions. Despite this revival, the growth for large corporates remains restricted due to their inclination towards capital markets.
Financial Implications
This divergence is quietly reshaping bank loan books. While banks like State Bank of India have reported reversing negative growth trends in corporate lending, citing working capital utilization as a key driver, a parallel trend of corporates using surplus cash or equity raises to repay loans has muted overall credit growth. Kotak Mahindra Bank and Axis Bank executives confirm that advances growth for banks will continue to be primarily driven by the SME and Mid-Market segments, which are expanding at a remarkable pace exceeding 25% annually.
Official Statements and Responses
State Bank of India Chairman CS Setty noted a return to positive growth in corporate lending, with expectations for double-digit expansion in forthcoming quarters. Anu Aggarwal, President & Head – Corporate Banking at Kotak Mahindra Bank, stated that advances growth will be dominated by the SME and Mid-Market segments, while larger corporates' reliance on banking credit will remain constrained by their use of capital markets. Vijay Mulbagal from Axis Bank highlighted that corporate balance sheets are currently at their strongest in a decade, with stable leverage metrics and expansionary promoter intent.
Regulatory Scrutiny
A potentially significant development involves the Reserve Bank of India's proposal to permit bank financing of acquisitions. Draft directions suggest allowing banks to fund up to 70% of an acquisition's value, capped at 10% of a bank’s Tier-1 capital. This move, a long-standing industry demand, could deepen domestic M&A activity and expand banks' solution toolkits.
Future Outlook
Looking ahead to 2026, four durable lending themes are expected to emerge: energy transition and grid-linked infrastructure; consumption-linked manufacturing across auto adjacencies, electronics, food processing, and export-competitive SMEs; services scaling through data and digital rails, including data centers and health delivery; and well-governed mid-market corporates and commercial real estate. Anu Aggarwal also pointed to specific opportunities in data centers and renewable energy, driven by strong sponsors and industrial demand. ESG-linked lending is also poised to gain relevance, driven by regulatory impetus and growing awareness of climate-related risks.
Impact
This structural shift towards capital markets by large corporates could lead to a more diversified financing ecosystem in India, reducing dependence on traditional banking. It presents both opportunities and challenges for financial institutions, potentially impacting the profitability of banks heavily reliant on large corporate loans. The proposed changes in acquisition financing and the focus on ESG lending could spur M&A activity and support sustainable businesses, contributing to overall economic growth.