Slim credit demand sees large PSBs turn focus to mid-sized corporates

With muted demand from large corporates, state-owned banks are shifting focus to mid-sized firms, which offer higher yields and stronger margins despite competition from bond markets

Large state-owned banks, including State Bank of India (SBI), Bank of Baroda (BoB) and Union Bank of India, are shifting their focus to mid-sized corporates amid muted credit demand from large companies. According to bankers, lending to mid-sized firms offers higher yields, supporting margins at a time when they are under pressure due to rate cuts by the Reserve Bank of India (RBI). 

“In the April–June quarter (Q1FY26) we had forgone low-yielding corporate loans. From Q2 onwards, we are planning to focus on the mid-sized corporate segment within the corporate book, which is comparatively higher yielding than large corporations,” said a banker at a state-owned bank. 

“Larger companies are not opting for fresh loans and micro, small and medium enterprises (MSMEs) have taken a large part of corporate borrowings. We are not very hopeful about the revival of credit demand from large corporates, hence the focus is on mid-sized corporates,” said another senior banking official at a state-owned bank. He added that lending to mid-sized businesses offered spreads of around 300–400 basis points (bps) over the repo rate, compared to less than 200 bps for AAA and above rated corporates.

 

“It is a good way to adjust risk-reward for the bank,” he said.

 

Banks have been facing subdued credit demand from large corporates, which are increasingly tapping the bond market for funding needs.

 

In Q1, the share of bank loans in total corporate funding dropped to 22 per cent, from 31.3 per cent a year ago, according to analysts. At the same time, corporates raised more funds from the bond market and commercial paper, indicating a growing shift towards market-based funding amid falling interest rates.

 

According to July RBI data, bank loans to micro and small industries rose 21 per cent year-on-year, while loans to medium industries increased 14.7 per cent. Meanwhile, loans to large industries grew only 0.9 per cent.

 

Some banks, such as Indian Bank and SBI, have dedicated mid-corporate verticals and internal targets to expand funding to mid-sized corporates amid a push from the central government and the RBI. SBI has a commercial client group that looks after the credit needs of both mid and large corporations.

 

A senior SBI executive said the bank is focusing on sectors such as non-banking financial companies, infrastructure, services, power and chemicals, with greater emphasis on power.

 

SBI has recorded an 18 per cent increase in its mid-corporate loan portfolio and is targeting 12–13 per cent credit growth in FY26, the SBI executive said, noting the shift in focus amid declining demand from large corporates.

 

At Indian Bank, the mid-corporate segment grew about 15 per cent in FY25, according to a senior official. 

Change in tack

• Move comes amid weak loan demand from large corporates
• Large firms are choosing bonds and commercial paper over bank loans
• SBI, Indian Bank, and others are building dedicated teams for mid-sized corporates
• Focus sectors include NBFC, infra, power, services, and chemical