India Inc's Funding Shift: Internal Resources Overtake Banks, NIPFP Study Finds

Preliminary findings from a study by the National Institute of Public Finance and Policy (NIPFP) for India's Finance Ministry reveal a substantial change in corporate financing strategies. Companies are increasingly turning to their own internal resources, which have grown from 60% in 2014 to 70% in 2024, becoming the primary funding source. Concurrently, the share of external financing, including bank loans, has decreased from approximately 39% to 29% over the same period.

Anuradha Thakur, Secretary of the Department of Economic Affairs (DEA) in the Finance Ministry, noted that reliance on institutional debt and borrowings from banks and financial institutions has fallen significantly. This transformation is also seen in the savings front, with a greater financialization of savings, evidenced by a shift from bank deposits towards mutual funds and equities. Mutual funds' Assets Under Management (AUM) have more than tripled, while bank deposits grew by just over 70% in the last five years.

This shift impacts banks, as low-cost CASA (Current Account, Savings Account) deposits show a declining trend, potentially reducing banks' net interest margins. On the credit side, financing from non-bank sources has increased, indicating a stronger reliance on market-based funding. The share of banks in total credit has fallen from 77% in 2011 to about 60% by fiscal year 2022.

Equity-based financing has also become more popular, with the number of Initial Public Offers (IPOs) increasing six-fold between 2013 and 2024. This has contributed to a significant rise in market capitalization, which has doubled every five years, reaching close to ₹475 lakh crores.

Challenges remain, particularly in the corporate bond market, which is dominated by highly rated financial issuers and suffers from weak secondary market liquidity. While initiatives like the Bharat Bond ETF have aimed to deepen the market, further efforts are needed in market making, credit enhancement, and streamlined disclosures to encourage more corporate bond issuances. Alternative investment vehicles like REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) are also still considered niche products despite being notified a decade ago.

Impact:

This news signals a fundamental shift in India's corporate finance landscape, suggesting improved financial health and reduced risk for companies due to lower leverage. It indicates a more developed capital market and a less bank-dependent economy, which can lead to more stable growth. The trend is positive for companies able to access market funding efficiently, but poses challenges for traditional banks reliant on corporate lending. The overall impact on the Indian stock market is likely positive due to stronger corporate fundamentals and deeper capital markets. Rating: 8/10.

Difficult Terms:

• Deleveraging: Reducing debt levels. Companies pay off loans or reduce their borrowing to improve their financial health.
• Internal Resources: Funds generated by a company from its own operations and profits, rather than borrowing from external sources.
• Financialisation of Savings: A trend where people increasingly invest their savings in financial assets like stocks, bonds, and mutual funds, rather than traditional assets like real estate or gold, or simply holding cash.
• Mutual Funds: An investment vehicle that pools money from many investors to invest in securities like stocks, bonds, and money market instruments. Mutual funds are operated by professional money managers.
• Equities: Stocks or shares in a company, representing ownership.
• Assets Under Management (AUM): The total market value of the assets that a fund manages on behalf of its clients.
• CASA (Current Account, Savings Account) Deposits: Low-cost deposits held by banks in current and savings accounts, which are typically considered stable and cheaper for banks to manage.
• Net Interest Margin (NIM): A measure of the difference between the interest income generated by a bank or financial institution and the amount of interest it has paid out to its lenders (for example, depositors), relative to its interest-earning assets. It is a key indicator of profitability for banks.
• Initial Public Offers (IPOs): The first time a company offers shares of stock to the public, typically to raise capital.
• Market Capitalisation: The total market value of a company's outstanding shares of stock, calculated by multiplying the current market price of one share by the total number of shares outstanding.
• Corporate Bond Market: A market where companies issue and trade debt securities (bonds) to raise capital from investors.
• Secondary Market Liquidity: The ease with which an asset can be bought or sold in the secondary market without significantly affecting its price.
• Bharat Bond ETF: An exchange-traded fund (ETF) that invests in bonds issued by public sector companies and government entities, designed to offer a safe investment option and deepen the bond market.
• Market Making: The activity of providing liquidity in a financial market by continuously showing the willingness to buy and sell a particular security at a publicly quoted price.
• Credit Enhancement: Measures taken to improve the creditworthiness of a debt issue, making it more attractive to investors and potentially lowering borrowing costs.
• REITs (Real Estate Investment Trusts): A company that owns, operates, or finances income-generating real estate. REITs provide investors with a way to invest in large-scale, income-producing real estate without directly owning the properties themselves.
• InvITs (Infrastructure Investment Trusts): Trusts that own infrastructure assets, such as roads, power transmission lines, and ports, and allow investors to invest in these assets through units. They are similar to REITs but focus on infrastructure.