Corporate lending by banks will rebound in coming quarters due to declining financing costs: report

Indian banks’ corporate lending, which has lagged overall credit growth in recent years, could see a rebound in the coming quarters as borrowing cost differentials narrow and regulatory support improves, a latest report from Ambit Capital shows.

The interest rate spread between bond yields and benchmark rates (EBLR/MCLR) is a key factor driving this shift, the report said.

The report notes that bank lending growth to businesses has remained subdued since the pandemic, largely due to aggressive corporate deleveraging and a shift to alternative sources of financing such as bonds, commercial paper and foreign loans.

The corporate debt-to-equity ratio has fallen sharply to around 0.7-0.8x in fiscal 2024, compared to around 1.0-1.1x pre-Covid, supported by strong internal provisioning and better access to equity markets, the report said.

“Interestingly, as the interest rate differential narrows, bank lending to corporates will increase, which could materialize in the coming quarters. Moreover, recent policy reforms by the RBI (such as reduction in risk weight, relaxation of large exposure norms) could support growth recovery, while the adoption/margin profile of acquisition financing remains manageable,” the report said.

Large banks and PSBs remain the main beneficiaries of the growth recovery, while the focus may remain on lower-rated accounts (AA/A) to manage margins, the report said.

It further highlighted that as businesses became less dependent on bank loans, system-wide credit growth lagged behind overall non-food credit growth.

It said a persistent interest rate differential, with bond yields remaining lower than bank interest rates linked to MCLR and EBLR, was pushing companies to tap capital markets instead of banks.

In terms of strategy, it expects banks will lean towards AA- and A-rated borrowers to balance interest rates and asset quality, while remaining cautious on lower-rated or unrated positions.

The Reserve Bank of India’s recent rollout of various guidelines and design reforms marks a structural shift towards a more accommodative environment for institutional credit. By easing various policy restrictions, the regulator is showing strong support for banks to re-engage the corporate sector as an engine for credit growth, the report said.

Published on December 29, 2025