Wednesday, 20 May, 2026
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Companies are wary of locking in high borrowing costs amid uncertainty over inflation and global growth. Bank loans offer a flexibility that bond markets often cannot
Indian companies seem to have rediscovered banks. For a while, it had appeared that large firms no longer needed them quite as much. Bond markets were cheaper, liquidity was plentiful and investors were willing to fund almost any respectable balance sheet. Banks, burdened by memories of bad loans and corporate excesses, turned instead to retail borrowers. Housing loans, personal credit and consumption finance became the safer route to growth.
That phase may be ending.
Companies are returning to banks not because banks have suddenly become more efficient, but because uncertainty has returned to financial markets. And uncertainty alters financial behaviour more powerfully than policy rates do.
The shift is already visible in the numbers. During the fourth quarter of FY26, yields on three-year corporate bonds rose nearly 80 basis points to 7.95 per cent. Bank lending rates, however, remained relatively steady. Across much of the banking system, the one-year marginal cost of lending rate stayed around 8.40 per cent.
The arithmetic by itself may not appear dramatic. But financial decisions are rarely made on arithmetic alone. Companies also think about volatility, refinancing risks and the possibility that conditions may worsen further. Once those fears enter the calculation, the predictability of bank loans begins to look attractive again.
What is happening in India is really part of a larger global unease.
The conflict in West Asia has unsettled debt markets and revived anxieties around oil prices and inflation. Investors have become cautious about lending long-term money. The world economy already looked fragile before geopolitical tensions intensified. Growth across major economies remains uneven, inflation has not disappeared as comfortably as central banks had hoped and financial markets have become unusually sensitive to every global disturbance.
India’s bond market could not remain insulated from this mood.
The benchmark 10-year government bond yield has climbed around 90 basis points over the past year to 7.12 per cent. What makes this interesting is that the rise has happened despite the Reserve Bank of India reducing policy rates by 125 basis points during the same period.
That contradiction tells its own story. Central banks can influence liquidity and short-term rates. They cannot easily control investor anxiety. Markets react not merely to policy but to fears about inflation, fiscal pressures, oil prices and geopolitical instability. In recent months, those anxieties have become stronger than the reassurance offered by lower policy rates.
Corporate borrowing costs have therefore moved upwards with sovereign yields.
The pressure is naturally greater on companies with weaker credit profiles. But even highly rated firms are finding long-term borrowing more expensive. In May 2025, AAA-rated companies could raise five-year money at around 6.65 per cent and 10-year debt at roughly 6.85 per cent. By May 2026, those rates had risen to nearly 6.90 per cent for five-year bonds and as high as 7.74 per cent for 10-year paper.
Long-term money no longer looks cheap enough to encourage enthusiasm.
Companies are reluctant to lock themselves into elevated borrowing costs at a time when the future direction of inflation and global growth remains unclear. Bank loans offer something bond markets do not easily provide — flexibility. Loans can be renegotiated, refinanced or prepaid if conditions improve later. That possibility matters during uncertain times.
The consequences are already visible. Corporate bond issuances fell 63 per cent year-on-year in April even as wholesale lending growth accelerated at banks.
At HDFC Bank, wholesale loan growth rose to 13 per cent in the fourth quarter of FY26 from 3.6 per cent a year earlier. Axis Bank reported wholesale lending growth of 38 per cent compared with 8 per cent in the same period last year. State Bank of India saw corporate lending growth rise to 15 per cent from 9 per cent a year earlier.
There is a certain irony in this reversal.
For years, Indian banks had reorganised themselves around retail lending because corporate credit had become synonymous with stress. After the banking crisis of the previous decade, retail borrowers appeared safer than large industrial groups. Consumption replaced investment as the preferred basis of credit growth.
Now even that model is beginning to show signs of strain. Retail credit growth has slowed, regulators have expressed concerns about unsecured lending and parts of the consumer loan market are beginning to exhibit stress. Banks are therefore turning back towards corporate lending at precisely the moment companies themselves are turning back towards banks.
Indian finance often moves in cycles that are psychological as much as economic.
When confidence is abundant, markets appear efficient and modern while banks seem slow and cumbersome. When uncertainty rises, the hierarchy changes quietly. Companies rediscover the comfort of institutional relationships. The old-fashioned bank manager begins to look more reassuring than anonymous bond investors.
None of this means India’s bond market will disappear or that bank-led finance is inherently superior. But it does suggest that India’s financial system remains more dependent on banks than many had assumed during the years of easy liquidity.
That dependence becomes visible whenever the world economy turns uncertain.
Financial markets are often celebrated for sophistication and efficiency. Yet, in moments of instability, economic actors usually seek something simpler: predictability. Banks, despite all their imperfections, still provide that in ways markets often cannot.
And perhaps that is the deeper lesson here. Modern finance expands impressively during periods of stability. But when anxiety returns, economies tend to fall back on institutions they already know and trust.
