Indian corporates are increasingly gravitating back toward bank financing as the cost gap between bank loans and bond market rates narrows. Specifically, the spread between the State Bank of India’s (SBI) Marginal Cost of Funds-based Lending Rate (MCLR) and AAA-rated corporate bond yields has compressed from 210 basis points in April 2025 to approximately 150 bps—levels last seen before the RBI began cutting rates.
What’s Driving the Shift?
Lower Cost of Borrowing via Banks
The narrowing spread makes bank loans more cost-effective compared to bond issuances. With bond yields rising and loan rates yet to fully adjust downward, banks are becoming the preferred choice for corporate borrowing.Anticipation of MCLR Cuts
As reductions in deposit rates gradually flow through to MCLR, banks are expected to reduce lending costs further—reinforcing the trend away from bond markets.Surge in Loan Demand
SBI forecasts double-digit growth in corporate loan volumes, indicating a strong revival of demand for traditional lending channels.Balanced Lending Environment
HDFC Bank CMD Sashidhar Jagdishan noted that credible, high-quality corporates continue to receive supportive working capital funding from banks, signaling confidence in this financing avenue.
Broader Financial Landscape
Interestingly, this shift comes on the heels of a period where corporates had increasingly leaned toward capital markets for flexibility and speed. In May 2025, companies issued nearly ₹61,200 crore in short-term bonds—almost triple the amount raised in May 2024—citing slow transmission of rate cuts via banks.
Nevertheless, the current environment of narrowing spreads and anticipated MCLR reductions has tilted the balance back toward traditional bank lending.
What Corporates Should Consider
| Factor | Implication |
|---|---|
| Interest Rate Sensitivity | With bond yields rising, locking in bank loan rates could be economically advantageous. |
| Timing Loan Decisions | As RBI’s policy easing continues, upcoming rate cuts may further lower borrowing costs via banks. |
| Credit Strategy | Strong credit ratings and existing lender relationships can offer access to favorable loan terms. |
