Despite hardening corp bond yields, India Inc not warming up to bank loans

Despite higher bond yields, companies prefer debt markets over bank loans as lending rates remain elevated and cash reserves cushion capex needs

Despite corporate bond yields hardening by 20-25 basis points, Indian corporates are not warming up to bank funding for their capital expenditure needs as bank lending rates remain elevated due to the higher cost of liabilities, compared to current rates in the debt capital market.

 

Additionally, the large cash reserves held by corporates are sufficient to meet their immediate funding requirements, banking industry and debt market participants said.

 

The primary bond market, after a buoyant first quarter, has lost momentum. Since July, issuance volumes have fallen sharply as a series of negative headlines pushed yields higher by 20-25 basis points. This sudden spike has kept many issuers on the sidelines, adopting a wait-and-watch stance. Since the start of July, the 10-year government securities yield has moved from 6.3 per cent levels to around 6.6 per cent at the end of August.

 

 

According to data from Primdedatabase, in July and August, Indian companies have raised a little over ₹1.19 trillion from the domestic debt capital market compared to over ₹3.42 trillion in April-June quarter of FY26.

 

In July, the companies raised ₹69,125 crore via bonds while in August they raised ₹50,152 crore.

 

“SDL (state development loan) rates are currently so elevated that investors are steering clear of corporate bonds. With yields rising almost daily and weekly, there is no clear sense of what the right pricing should be. The rate markets, as a result, appear severely dislocated and almost broken,” said a bond market insider, on the condition of anonymity. 

 

While the corporate bond issuances have gone down, and yields have hardened, the corporate credit growth has not picked up.

 

According to latest data from RBI, credit to industry grew 6 per cent year-on-year (Y-o-Y) in the fortnight ended July 25, compared to 10.2 per cent in the same period last year. This is marginally higher than the 5.5 per cent growth recorded in June.

 

“The cost of liabilities remains elevated for banks. While some transmission has taken place, it has not been sufficient to bring down lending rates for corporate borrowers to levels comparable with those in the bond market. Bank lending to corporates continues to hover around 8-8.5 per cent, whereas, despite elevated yields, corporates are able to raise funds from the debt market at approximately 7.5 per cent,” said an executive director at a state-owned bank.

 

“Moreover, private capital expenditure remains subdued, with many corporates sitting on large cash reserves. In addition, private credit is meeting part of the funding needs of lower-rated corporates, reducing their dependence on traditional bank lending. Another factor driving corporates toward the bond market is the relatively lower compliance burden, particularly the absence of restrictions on the end use of funds raised through bonds,” he added.

 

RBI data shows, the weighted average lending rate (WALR) on fresh rupee loans of banks stood at 8.80 per cent in July 2025 while the WALR on outstanding rupee loans stood at 9.38 per cent during this period. Additionally, the one-year median Marginal Cost of Funds based Lending Rate (MCLR) of banks moderated to 8.60 per cent in August 2025 from 8.75 per cent in July 2025. 

 

“While yields have stayed elevated, bonds still remain more attractive for corporates compared to bank loans. July and August were relatively muted, but corporate credit growth has also not picked up sharply. It is therefore too early to conclude that corporates will shift back to bank funding just because yields have risen,” said a banker at a private sector bank.

 

According to Venkatakrishnan Srinivasan, founder & managing partner, Rockfort Fincap LLP, some corporates are diversifying their funding mix, turning towards offshore borrowings, including ECBs and foreign currency loans. Interestingly, despite the rupee’s depreciation, overseas borrowings have seen a pickup since April, aided by India’s sovereign rating upgrade from BBB- to BBB, which has improved pricing and access.

 

Although banks are transmitting the rate cut, the WALR still remains elevated compared to bond market levels, particularly for high-rated borrowers, he said.

 

“Within the bond market itself, there is a strong tilt toward the short end of the curve. Demand is firm for shorter maturities, but supply is running ahead, while at the long end, issuance has thinned as higher yields have discouraged borrowers,” he added.