Indian Banking Sector: Corporate Credit Revival Hinges on Rising Bond Yields

India’s banking sector may be entering a turning point as rising bond yields threaten to make market borrowings more expensive, potentially driving corporates back to traditional bank credit. For much of the past year, companies have relied heavily on bond markets and commercial papers, which kept corporate loan growth at banks muted; Business Line Reported.

Bond Market Slowdown
Corporate bond issuances crossed ₹3 lakh crore in Q1FY26 — among the highest in recent years. However, momentum has softened since August as yields have firmed up, signalling higher costs of market funding.

State Bank of India (SBI), the country’s largest lender, expects a revival in corporate credit demand if bond yields continue to harden, forcing corporates to shift borrowing back to the banking system.

Rama Mohan Rao Amara, Managing Director – International Banking, Global Markets & Technology at SBI, noted at the CII Eastern Region Banking Colloquium that issuance volumes had slowed in Q2. “If the yields continue like that for any reason, corporates will have to come back to the banking system,” he remarked, underlining the shifting dynamics between capital markets and banks.

Muted Loan Growth Across Banks
The funding shift has already been reflected in quarterly performance:

HDFC Bank reported corporate and wholesale advances rising just 1.7% in Q1FY26, a sharp slowdown from 18.7% a year earlier.

ICICI Bank’s domestic corporate loan growth eased to 7.5%, compared to 10.3% last year.

Union Bank of India recorded growth of 2.68%, down from 7.81% in the same quarter of FY25.

Banks have also flagged corporates’ increasing preference for commercial papers in place of bank working capital facilities.

Trade Pressures Complicate Outlook
Adding to these funding challenges are global trade headwinds. The United States has imposed an additional 25% tariff on Indian goods, taking the total levy to 50%. Linked to India’s energy trade with Russia, the move has raised concerns over market access, competitiveness, and employment.

While front-loading of shipments in Q1 cushioned the immediate impact, industry leaders caution that disruptions could emerge from Q2 onwards if no alternatives are arranged. Amara noted it was “too early to comment on anything significant happening,” but acknowledged that the Finance Ministry is reviewing requests from industry bodies for relief.

Outlook: Banks Eye a Revival
Retail and MSME loans have so far carried overall credit growth, but a rebound in corporate lending could rebalance banks’ portfolios. Elevated bond yields could accelerate this shift, restoring banks’ central role in corporate funding.

At the same time, uncertainties surrounding tariffs, trade access, and geopolitics remain potential drags on corporate borrowing appetite.

In summary: Firming bond yields are positioning banks for a possible corporate credit revival. However, whether this trend takes root will depend not only on domestic funding costs but also on how India navigates external shocks in the months ahead.