Indian private banks are seeing a sharp rise in corporate lending as companies prefer bank loans over costly bond market borrowings. With overall credit growth hitting a two-year high, major lenders like HDFC Bank and ICICI Bank are reporting double-digit loan growth. This shift highlights a change in corporate funding strategies amidst high interest rates in the bond market.
Indian private sector banks are currently witnessing a significant rebound in corporate credit demand, as companies pivot away from the bond market. With sovereign 10-year bond yields remaining elevated due to global factors like oil price volatility and geopolitical concerns, the cost of raising capital through bonds has become prohibitive for many corporates. Consequently, firms are turning to banks for more flexible and affordable financing options, including term loans and working capital.
The scale of this growth is evident in the recent performance of India's leading private lenders. HDFC Bank, the nation's largest private bank, recorded a substantial 19% year-on-year increase in its corporate loan book, a dramatic shift from the marginal 1.7% growth reported in previous periods. Similarly, ICICI Bank saw an 18.5% rise in domestic corporate loans, while Kotak Mahindra Bank reported a 15% expansion. Yes Bank has also seen a major surge, with its corporate and institutional portfolio growing by over 41% as it diversifies beyond its traditional retail focus.
This trend has propelled overall bank credit growth to 18.6% year-on-year as of late June, according to data from the Reserve Bank of India. While this growth signals a healthy appetite for investment, it comes at a time when banks are grappling with slower deposit mobilization. To manage this liquidity gap, the banking sector is closely watching foreign currency deposit inflows, which are expected to cross $50 billion by September. Such inflows, potentially supported by central bank policies on hedging costs, could provide much-needed stable funding for lenders.
The demand for credit is broad-based, with significant activity noted in sectors such as electronics, automobiles, renewable energy, and commodities. According to management commentary from Axis Bank, the firm is targeting loan growth that exceeds the industry average by approximately 300 basis points in the medium term. This confidence is supported by a significantly cleaner balance sheet across the industry, following years of aggressive reduction in non-performing assets and more disciplined underwriting standards compared to previous credit cycles.
For investors, the key monitorable remains the sustainability of this loan growth versus the pace of deposit collection. While the shift from bond markets to bank loans provides a short-term volume boost, the ability of banks to maintain healthy net interest margins while managing the cost of funds will be crucial. Investors may track upcoming quarterly updates to see if this trend continues or if rising borrowing costs eventually temper corporate capital spending plans.