Bank Credit Growth Expected to Moderate as Firms Diversify Funding Sources
Bank credit growth in India is projected to slow gradually during FY27 as large corporations increasingly turn to bonds and overseas borrowings, according to a CareEdge BFSI Research report. The shift is being driven by recent Reserve Bank of India (RBI) measures that have reduced the cost of external commercial borrowings (ECBs) and improved domestic bond market conditions.
The report notes that overall credit demand is likely to remain healthy, but banks may account for a smaller share of corporate funding as market-based sources become more attractive. "Bank credit growth is expected to moderate gradually as funding preferences increasingly shift towards market-based sources," the report stated.
RBI Policies Boost Banks' Liability Profile and Overseas Borrowing Appeal
According to CareEdge, the RBI's recent policy measures have strengthened banks' funding positions while making overseas borrowing more competitive for large borrowers. "The RBI's measures to encourage FCNR(B) deposits are expected to strengthen banks' liability profile by improving deposit mobilisation and funding availability," the report said. At the same time, "lower hedging costs for eligible ECB borrowers, together with softer G-sec yields, are expected to encourage greater use of ECBs and domestic debt markets by large borrowers, reducing their reliance on bank borrowings."
The RBI's forex swap facility has reduced the effective hedging cost for eligible borrowers from around 2.8 per cent to a fixed 1.5 per cent, significantly lowering the overall cost of overseas borrowing. This makes ECBs more attractive for infrastructure companies, power sector entities, public sector undertakings, and large non-banking financial companies (NBFCs).
Domestic Bond Market Conditions Support Shift Away from Bank Funding
CareEdge also expects improving domestic bond market conditions to accelerate the move away from bank funding. "Lower benchmark yields are expected to reduce borrowing costs in the domestic debt market, encouraging NBFCs and large corporates to increasingly access bonds and NCDs for incremental funding requirements," the report said. As a result, "a larger share of financing requirements is likely to be met through ECBs and domestic debt markets rather than bank borrowings."
Current Bank Lending Remains Strong Despite Expected Slowdown
Despite the anticipated moderation, bank lending continues to be robust. Non-food bank credit grew 17.4 per cent year-on-year in May 2026, supported by broad-based growth across industry, services, agriculture, and retail lending. The services sector led the expansion with 20.4 per cent growth, driven by strong lending to NBFCs. Industrial credit rose 17.5 per cent, fueled by higher borrowing from large corporates, MSMEs, and infrastructure-related sectors. Personal loan growth remained resilient at 15.4 per cent, supported by vehicle finance and gold loans.
The report noted that the recent surge in bank lending was partly due to weaker activity in debt markets, which pushed companies towards bank financing. As bond markets recover and overseas funding becomes more competitive, CareEdge expects bank credit growth to gradually return to more normal levels.
