Bank Lending Expands at Fastest Rate in Nearly 2 Years Amid Decline in Bond Sales

Bank lending in India has grown at its fastest pace in nearly 2 years as companies increasingly turn to loans instead of raising money through bonds, as per The Bloomberg report.  

Reserve Bank of India (RBI) data showed credit growth of 16.2% in the year ended 15 May, the highest since June 2024. 

At the same time, activity in the bond market has slowed. Data compiled by Bloomberg showed local bond issuances fell 11% to ₹10.9 trillion.  

Higher borrowing costs in debt markets have made bank loans a more attractive funding option for many firms. 

Rising Yields Weigh on Bond Issuance 

Government bond yields have moved up in recent months, pushing up the cost of raising funds through the market.  

The benchmark sovereign bond yield has risen by 38 basis points to 7.04% since the conflict involving Iran began three months ago. 

As benchmark yields rise, companies issuing bonds generally have to offer higher returns to investors. This has reduced appetite for fresh bond sales across several sectors. 

Borrowers Shift Funding Mix 

The change is visible across both financial and non-financial companies. Muthoot Microfin said around half of its borrowings now come from banks, helping lower its funding costs by about 75 basis points. 

Power Grid Corporation of India recently obtained a credit facility of up to ₹4,000 crore from State Bank of India. The state-run company last raised funds through the bond market in December. 

Lower-rated borrowers have also moved towards bank funding, with market participants estimating a cost advantage of around 60 to 70 basis points compared with bond issuance. 

Pressure Builds on Bank Funding 

Strong demand for loans has outpaced deposit growth for 8 consecutive months. As of 15 May, the gap between credit growth and deposit growth stood at around 400 basis points, the widest in nearly 2 years. 

To meet funding requirements, banks have increased their use of certificates of deposit and other short-term instruments. Rates on 6-month certificates of deposit rose by 88 basis points in May, the sharpest monthly increase in 4 years. 

Read More: Apple India MD, SBI Chairman Join Piyush Goyal’s 29-Member Board of Trade! 

Conclusion 

The gap between loan and bond borrowing costs has led more companies to rely on banks for funding. While this has supported credit growth, it has also increased the need for banks to secure additional sources of funds. 

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