Banks, which ruled the roost in the corporate credit market until about a decade ago, accounting for more than 80 per cent of the funding accessed by India Inc between 2006 and 2015, seem to have taken a back seat in the last few years. Cut to 2025, the share of bank funding to the corporate sector has dropped to 34 per cent during 2016-25.

Interestingly, this cutback of bank credit has, in some way, helped companies evolve to look for alternative funding options, that too at lower cost.

The gush of funds from the domestic capital markets in the past decade has not only opened up diverse fundraising avenues— contributing to the nation’s infrastructure development, corporate development, innovation, and financial inclusion — but also brought to fore an interesting paradox!

This significant change in the corporate credit landscape has helped democratise and nurture entrepreneurship, which is set to play a pivotal role as the country marches towards an ambitious goal — a $10-trillion economy.

Despite stock market volatility, Indian capital markets remain a crucial growth driver.

In 2024 alone, companies raised ₹3.5 lakh crore through 438 issuances, underscoring the growing reliance on capital markets for funding, with equity issuances and debt instruments serving as vital capital sources.

Notably, Indian corporates raised ₹6.49 lakh crore between 2016 and 2025 through banks (based on end-period closing bank outstanding), while equity markets, including qualified institutional placements (QIPs) and initial public offerings (IPOs), saw issuances worth ₹12.35 lakh crore. This fundraising momentum has laid the foundation for a robust and diversified capital market ecosystem.

Unlike traditional banks, which often rely on asset-backed lending, capital markets assess capital deployment and risk more holistically, offering companies greater flexibility in raising funds. This transition brings investment banks, securities firms, asset managers, and wealth management companies to the forefront of corporate financing, fostering a more competitive and dynamic financial ecosystem.

Changing role of banks

As companies increasingly turn to capital markets for financing, banks now focus more on retail lending than corporate credit.

Several factors have contributed to this shift. The rise of mutual funds, alternate investment funds (AIFs), and insurance players has deepened capital markets, providing companies with more diverse funding options. Moreover, the mutual fund industry has grown from ₹1.5 lakh crore in 2005 to ₹54 lakh crore today, a 35-fold increase.

In contrast, the growth in banks’ ‘current account, savings account’ (CASA) balances has been slower, with a 12.5x increase to ₹85 lakh crore in the same period.

Retail lending now accounts for a growing share of non-farm bank credit. In the late 1990s, corporate credit comprised 40 per cent non-farm credit, but by 2024 this fell to 18 per cent. This shift is positive for the economy, as it reflects rising consumption financing, which stimulates demand and fosters economic growth.

At the same time, banks are under pressure to manage cost structures and net interest margins (NIMs), prompting strategies such as outsourcing and shared services to improve operational efficiency. We saw similar trends playing out in the US in the last quarter of the 20th century, with platforms like Visa getting spun off from banks

Credit flow

While capital markets are pivotal in raising funds, the banking sector remains the backbone of credit flow in India. Banks provide essential working capital, term loans, and project financing to sectors like manufacturing, real estate, agriculture, and small and medium enterprises (SMEs). By 2025, Indian banks have seen encouraging credit growth, with an expansion of lending to key sectors such as infrastructure, micro, small and medium-sized enterprises (MSMEs), and technology.

The government has actively participated in capital markets, using bond issuances to finance budget deficits and infrastructure projects.

Sovereign bonds offer access to competitively priced, long-term capital, helping the government meet fiscal goals and support broader economic growth. This collaboration between the government and capital markets strengthens the financial foundation needed for sustainable development.

Capital markets offer businesses flexibility, foster financial inclusion, and support large-scale infrastructure development. Meanwhile, the banking sector continues to play a critical role in credit flow, with ongoing reforms helping to manage challenges like non-performing assets (NPAs).

As capital markets attract both domestic and foreign investments, the collaboration between banks, the government, and financial institutions creates a robust foundation for sustainable economic progress. This synergy is propelling India towards a more dynamic, inclusive, and globally competitive economy.

(The writer is Managing Director, Equirus Capital Pvt Ltd. The views are personal)

More Like This

Published on March 30, 2025