Bank credit growth to ease as corporates tap bond markets, overseas funding: CareEdge

Bank credit growth is expected to moderate gradually in FY27 as large corporates increasingly turn to domestic bond markets and overseas borrowings, aided by the Reserve Bank of India's recent policy measures that have made external funding more attractive, according to a CareEdge BFSI Research report.

While overall demand for credit is expected to remain healthy, banks are likely to finance a smaller share of corporate borrowing as market-based funding gains traction.

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"Bank credit growth is expected to moderate gradually as funding preferences increasingly shift towards market-based sources," the report said.

CareEdge said the RBI's recent measures are likely to improve banks' funding profile while simultaneously lowering borrowing costs for large companies in overseas markets.

"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 report highlighted that the RBI's forex swap facility has reduced the effective hedging cost for eligible borrowers from around 2.8% to a fixed 1.5%, significantly lowering the overall cost of overseas borrowing. This is expected to make External Commercial Borrowings (ECBs) increasingly attractive for infrastructure companies, power sector firms, public sector undertakings and large non-banking financial companies (NBFCs).

Improving conditions in India's domestic debt market are also expected to accelerate the shift away from bank funding.

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"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."

Despite the anticipated moderation, bank lending remains robust. Non-food bank credit grew 17.4% year-on-year in May 2026, supported by broad-based expansion across industry, services, agriculture and retail segments.

The services sector recorded the fastest growth at 20.4%, driven by strong lending to NBFCs, while industrial credit rose 17.5% amid higher borrowing by large corporates, MSMEs and infrastructure-related sectors. Personal loans also remained resilient, expanding 15.4% on the back of vehicle financing and gold loans.

According to CareEdge, the recent surge in bank credit was partly driven by subdued activity in debt markets, which pushed companies towards bank financing. As bond markets revive and overseas funding becomes more cost-effective, the report expects bank credit growth to gradually normalize in FY27.