Companies Pivot to Bank Loans as Bond Costs Rise
A Jefferies report reveals Indian companies are opting for bank loans over expensive bonds, driving massive credit growth in key sectors.
Indian corporations are rapidly changing their financing strategies, moving away from the bond market in favor of traditional bank lending. According to a recent research report by Jefferies, banks have become the primary lifeline for businesses as the cost of borrowing through corporate bonds and commercial paper has become increasingly expensive.
The data reveals a massive shift in the credit landscape. Between November 2025 and August 2026, banks accounted for a staggering 81 per cent of all fresh credit flowing into the economy. This pivot has significantly boosted the momentum of bank credit growth, which surged to 18 per cent year-on-year in August, far outstripping the 10 per cent growth seen in non-bank credit.
The Flight from Expensive Bond Markets
The core driver behind this movement is the rising cost of alternative financing. Jefferies noted that companies, particularly those with high working capital requirements or those that previously relied heavily on the bond market, are now turning to banks to meet their essential credit needs. As borrowing through external sources and commercial paper becomes relatively more costly, the bank becomes the preferred destination for capital.
This shift is most evident in the corporate sector. Bank credit growth for corporations accelerated from 11 per cent in November 2025 to a robust 22 per cent by August 2026. Furthermore, corporate loans made up approximately 58 per cent of all incremental bank lending during this period.
Sectors Driving the Credit Surge
The demand for bank credit is not uniform across all industries. Several key sectors are leading the charge in seeking bank financing, including:
- NBFCs: Witnessing a massive 37 per cent year-on-year growth in bank lending in August.
- Wholesale Trade: Credit expansion reached 26 per cent.
- Commercial Real Estate & Chemicals: Both sectors saw a 23 per cent increase in lending.
- Power Sector: Credit expanded by 21 per cent.
Future Outlook: A Looming Moderation?
While the current trajectory shows aggressive growth for banks, Jefferies warns that this pace may not be sustainable indefinitely. The report suggests that the rate of bank credit growth could begin to moderate starting in December 2026 or January 2027. This slowdown is expected as a higher comparison base takes effect and as financing conditions potentially ease.
If access to corporate bond markets and external borrowing improves, companies may once again reduce their reliance on bank loans. Jefferies has provided a baseline expectation that bank credit growth could moderate to 16 per cent by March 2027 and further down to 13 per cent for the FY28-29 period. Despite this projected cooling, the firm maintains a positive stance on the banking sector, stating a preference for banks over Non-Banking Financial Companies (NBFCs).