Indian Corporates are Moving Away from Banks to Seek Cheaper Capital

The Reserve Bank of India's (RBI) Financial Stability Report (FSR) for June 2025 highlights a significant shift in corporate financing strategies. Indian companies are increasingly turning to capital markets—particularly corporate bonds and equity markets—rather than traditional bank loans to secure funding. This trend reflects a broader move towards cost-effective and flexible financing options in a dynamic economic environment.

Surge in Capital Market Resource Mobilization

Data from the FSR indicates a 32.9% increase in resource mobilization through capital markets, reaching Rs 15.7 lakh crore by March 2025. Debt instruments accounted for 63.5% of this total, with private placements dominating the debt segment at 99.2%. Equity issuances contributed 27.4%.

In contrast, bank lending to industry slowed to just 6.9% in FY25, signaling a reduced reliance on traditional bank loans. This shift highlights the increasing preference for capital markets as a more efficient and cost-effective means of raising capital.

Corporate Bonds Gaining Popularity

The corporate bond market has seen substantial growth, with net outstanding corporate bonds increasing to Rs 53.6 lakh crore by March 2025. This expansion is supported by the highest-ever fresh issuance of Rs 9.9 lakh crore during FY25. AAA-rated firms accounted for 67.1% of total issuances, reflecting investor confidence in high-quality debt instruments.

The preference for shorter-duration bonds has also risen, with two- and three-year AAA-rated corporate bonds offering yields of 6.56% and 6.70%, respectively. These yields are approximately 20–30 basis points higher than those of equivalent government bonds, making them attractive to investors seeking higher returns.

Declining Bank Lending

Bank lending to the industrial sector has decelerated, with growth slowing to 6.9% in FY25. This trend may be attributed to factors such as tighter liquidity conditions, increased risk aversion among banks, and the more stringent regulatory environment. Consequently, corporates are exploring alternative financing avenues to meet their capital requirements.

Slower Corporate Debt Growth

While companies are tapping into capital markets, overall corporate debt growth has moderated. In FY25, corporate debt levels grew by just 2.9%, the slowest pace in five years. This indicates a strategic move towards internal funding and a cautious approach to leveraging, possibly in response to past experiences with high debt levels.

RBI's Role in Supporting Capital Markets

The RBI's Financial Stability Report emphasizes the importance of a deep and liquid corporate debt market as an alternative to bank finance. Such a market widens the investor base and enhances the overall resilience of the financial system. The RBI's efforts to maintain financial stability, including robust capital buffers in banks and non-banking financial companies (NBFCs), contribute to a conducive environment for capital market growth.

Outlook and Implications

The ongoing shift by Indian corporates from relying on traditional bank financing to capital market options is reshaping the corporate funding landscape. This transition is not just a short-term trend, but a part of a larger, long-term structural change in the way businesses manage their capital. Let's explore the key factors driving this shift in greater detail:

Cost Efficiency: One of the primary reasons Indian corporates are opting for capital markets over banks is the cost efficiency that these markets offer. When we look at the borrowing costs, corporates can often secure funds from the debt capital markets at a lower rate than from banks, especially with growing investor appetite for corporate bonds.

Flexibility: Capital markets offer a level of flexibility that traditional banks often struggle to match. This flexibility enables corporations to manage their funding requirements in a more customized manner.

Market Liquidity: One of the key benefits of capital markets over traditional bank lending is the liquidity they provide. The corporate bond market in India has been growing, offering corporates a significant advantage in terms of access to liquid funding.

Global Trends and Diversification of Funding Sources: The shift towards capital markets is not only an Indian phenomenon but part of an international trend where companies worldwide are diversifying their funding sources to reduce reliance on traditional bank loans.

Regulatory Environment and Support from the RBI: The RBI plays a critical role in ensuring the stability and attractiveness of the capital markets. As corporates move away from traditional bank funding, the regulatory environment is key to maintaining investor confidence and market health.

Before You Go

This transition aligns with global trends, where companies are diversifying their funding sources to optimize their capital structure and reduce their dependency on traditional banking channels. As the capital markets continue to evolve, corporates are likely to increasingly leverage these platforms for their financing needs.