Whalesbook
Bank Lending Takes Center Stage
India's corporate sector significantly reoriented its finances in fiscal year 2026, with bank lending strongly re-emerging as the primary funding source. According to the Reserve Bank of India's April bulletin, total funds raised reached ₹44.7 lakh crore. Non-food bank credit surged to ₹29.2 lakh crore, capturing 65.4% of this total. This is the largest share for bank lending in three years. This marks a clear shift away from the more varied funding sources seen in past years. Total outstanding bank credit stood at ₹219 lakh crore by March 2026, a strong 16% jump from the previous year. This robust growth meant bank lending expanded faster than deposits, creating ongoing funding pressures for banks.
Markets Present Challenges for Companies
While bank loans grew, other market funding sources faced a more mixed and challenging environment. Raising money through stocks saw a significant drop, with its share of overall company funding falling from 10.8% in FY25 to 7.7% in FY26. Although India's stock market saw record initial public offerings (IPOs) totaling ₹1.8 lakh crore in FY26, growth in the Small and Medium Enterprise (SME) sector slowed. More importantly, individual investors, who had bought more stocks than they sold for six years, became net sellers in FY26, unloading ₹5,803 crore worth of shares.
At the same time, the corporate bond market, which had been gaining popularity, slowed down. Money raised through listed corporate bonds dropped 9% from the previous year to ₹8.99 trillion in FY26, mainly because bond yields increased sharply. The yield on the 10-year government bond rose by 55 basis points to 7.03% by March 2026. This made corporate bonds less attractive compared to bank loans. This, along with a large 57.8% drop in commercial paper (short-term debt) issuance, indicates less interest in short-term funding and a stronger preference for longer-term borrowing or bank loans.
Foreign Investment and Debt Offer Support
In contrast to India's stock markets, foreign capital played a growing role. Its share of total funds increased from 6.8% in FY24 to 11% in FY26, totaling ₹4.9 lakh crore. Foreign Direct Investment (FDI) equity coming into India grew strongly by 22% year-on-year in rupee terms from April to December 2025, reaching ₹4,16,709 crore. Net FDI also made a significant recovery, turning positive in February 2026 after six months of outflows. External Commercial Borrowings (ECBs), or international loans for companies, jumped 66.2%, showing increased interest in foreign debt. Corporate bond issuances also rose 52.4% to ₹3 lakh crore in FY26.
Why the Shift to Bank Loans?
This clear shift towards bank financing is driven by several factors. Rising bond yields, influenced by global inflation worries and India's cash flow situation, made corporate bonds less cost-effective compared to bank loans. The Reserve Bank of India's decision to keep its key interest rate (repo rate) at 5.25% in April 2026 signals its aim to manage inflation while supporting growth, despite global geopolitical risks. Analysts expect the Indian banking sector to remain strong, forecasting 11-13% credit growth from January to June 2026. This is supported by better bank balance sheets and demand from consumers and small businesses.
However, fewer individual investors in stocks and less activity in short-term debt suggest some market participants are cautious. This caution may stem from global economic challenges, including the conflict in West Asia. While companies' plans for investment increased to ₹4.35 lakh crore in FY26, the overall funding choices show a strategic move away from stock markets towards bank credit, which is easier to get but can be more restrictive.
Potential Risks in the New Funding Mix
Despite the strong growth in bank lending, several underlying concerns need attention. The sharp drop in individual investors in stocks suggests worries about future market performance or a move towards safer investments like gold and silver, which performed well in FY25 and FY26. Relying too heavily on bank credit, while attractive short-term due to good rates, could create new risks. Banks' ongoing issue of credit growing faster than deposits could lead to tighter cash flow in the financial system if it continues. Also, the drop in commercial paper and less appealing corporate bonds mean companies might be choosing bank loans over more flexible market funding. Bank loans can sometimes come with stricter rules and fewer options for long-term loan changes. Geopolitical tensions and potential supply chain issues from conflicts, like the one in West Asia, also risk slowing economic growth and increasing inflation. This could affect company profits and their ability to repay debts.
What's Next for Corporate Funding?
Looking ahead, India's economy is expected to grow 6.9% in FY27, however, global uncertainties and possible El Niño effects on food prices pose risks to this forecast. Company profits are expected to rebound to the mid-teens in 2026, but the funding environment is likely to stay changeable. The RBI's focus on controlling inflation and supporting growth, alongside reforms to boost the corporate bond market, will be important. However, the current strong lean towards bank loans and weak stock market performance suggest that overall corporate funding will continue to be shaped by interest rate trends, global economic stability, and investor willingness to take on risk.