Corporate Loans Overtake Retail as Rate Cuts Shift Funding

Corporate borrowing from Indian banks is accelerating past retail loan growth, with companies shifting from bond markets to cheaper bank credit after the Reserve Bank of India cut rates. Recent repo rate reductions lowered banks' marginal cost of funds-based lending rates, making bank loans more attractive at a time when corporate bond yields remain elevated. Global rate expectations and domestic inflation concerns have kept bond yields high. The gap between bank lending rates and bond yields has widened, prompting companies to refinance debt at lower cost.

The trend started after the RBI delivered two consecutive 25-basis-point cuts in 2025, reducing the repo rate to 5.75%. Banks have passed on some of that reduction through their MCLR-linked products, though transmission has been partial. Large corporates with access to both markets have switched from issuing bonds to drawing down bank lines. Smaller firms, which rely almost entirely on banks, have seen the strongest credit growth. Small business loan disbursements have risen sharply, aided by improved liquidity in the banking system. The RBI has conducted open market operations to inject cash, easing constraints on bank lending capacity.