Bank credit to India's corporate sector is accelerating faster than individual loans. Companies are increasingly choosing bank financing over bonds to cut costs, as corporate bond yields rise. This trend is supported by recent repo rate cuts and improved liquidity.
Corporate Borrowing Surges Ahead of Retail Lending
Bank credit extended to the corporate sector is now growing at a faster pace than loans to individuals. This shift is driven by companies increasingly favoring the loan market over bond financing to achieve cost savings amidst rising corporate bond yields.
Data from the Reserve Bank of India (RBI) for the fortnight ending May 31 revealed that bank credit to industry, encompassing both large and small enterprises, expanded by 18% year-on-year. This contrasts with the 15% growth recorded in retail loans during the same period.
Factors Driving Corporate Loan Attraction
Analysts attribute this trend to a combination of factors. Successive benchmark repo rate cuts by the RBI, totaling 125 basis points since February 2025, have lowered bank lending rates. Simultaneously, a spike in corporate bond yields has diminished the attractiveness of debt capital markets for companies.
Shivaji Thapliyal, head of research at Yes Securities, noted that the differential between corporate bond yields and the benchmark Marginal Cost of Funds-based Lending Rate (MCLR) is at its narrowest since March 2023. The gap for five-year loans has virtually disappeared, making direct bank lending significantly more appealing.
Thapliyal described this as a cyclical rather than a structural change, not necessarily indicative of new project investments. He anticipates corporate credit growth to persist in the mid-teens, bolstered by improved liquidity from FCNR(B) deposits and a cooling of wholesale deposit rates. These factors are supporting substantial lending to the corporate sector.
Segmented Growth within Corporate and Retail Loans
Within the industrial segment, loans to micro and small companies showed the most vigorous growth, rising 26% in late May. Medium-sized companies saw 21% growth, while large companies experienced 14% expansion. Retail loan growth remained robust at 15%, propelled by a doubling of the gold loan book to ₹4.61 lakh crore and an 11% year-on-year increase in the housing loan segment, which constitutes the largest portion of personal loans.
Outlook for Credit Growth
Analysts suggest that the trajectory of corporate loan growth will largely be dictated by the bond market's performance. Lower bond yields could entice cost-conscious companies to shift their working capital requirements back to the debt market. Nevertheless, overall bank credit growth is still projected to conclude the financial year in the low to mid-teens.