Indian businesses have shifted their funding preference to bank loans instead of bonds, pushing commercial funding to Rs 17.5 lakh crore between April and August 2026. High bond yields are forcing companies to bypass bond markets. While this indicates strong business demand, the reliance on bank credit may raise interest costs for companies, potentially pressuring profit margins if rates remain high.
Indian companies have significantly changed how they raise capital in the first five months of FY27, moving away from bond markets to traditional bank loans. Data for April to August 2026 shows that while total funding for the commercial sector rose by 55.4% to Rs 17.5 lakh crore, corporate bond issuances by non-financial firms dropped sharply to Rs 0.3 lakh crore, compared to Rs 1.5 lakh crore in the same period last year.
Why Companies are Choosing Banks
The main reason for this trend is the cost of borrowing. With bond yields remaining elevated, corporate treasurers are finding it more expensive to raise money through the bond market. Instead, they are turning to banks, which have seen non-food bank credit climb to Rs 9.8 lakh crore. This preference for bank credit over bonds suggests that companies are prioritizing access to immediate capital over the fixed-cost benefits usually offered by bond markets.
Which Sectors are Borrowing Most
The demand for credit is broad, but some sectors are growing faster than others. Medium-sized industries led the trend with a 31.8% year-on-year increase in borrowing. Small and micro industries also showed strong demand with a 23.0% rise, while large enterprises saw a 14.9% increase. In the services space, the software sector stood out with a 41.8% jump in credit uptake, reflecting ongoing investments in digital infrastructure. Shipping services also remained strong, with a 25.6% increase in credit usage.
What This Means for Investors
For banks, this trend could support loan book growth and potentially improve net interest income. However, for the borrowing companies, there is a risk. Bank loans often carry floating interest rates, which are typically more volatile than long-term bonds. As companies rely more on these loans, their interest expenses may rise, which could put pressure on profit margins if demand for their own products does not grow fast enough to cover the extra costs.
According to the Reserve Bank of India’s latest quarterly lending survey, this high demand is likely to continue. The net response for loan demand reached 46.7 in the second quarter, and lenders expect this momentum to carry into the third quarter. Investors may track how companies manage their interest costs as they continue to fund their operations through bank credit rather than longer-term debt options.