Bank lending in India is expanding at the fastest pace in nearly two years as companies choose loans over bonds as a cheaper source of financing.

Credit growth expanded at 16.2% in the year through May 15, the fastest clip since June 2024, according to the Reserve Bank of India data. Local bond sales, meanwhile, fell 11% to 10.9 trillion rupees ($114 billion), Bloomberg-compiled data show. 

About half of Muthoot Microfin Ltd.’s borrowings now come from banks, helping the shadow lender cut borrowing costs by about 75 basis points, Chief Executive Officer Sadaf Sayeed said in an interview. State-run Power Grid Corp. of India recently secured a credit facility of as much as 40 billion rupees from the State Bank of India, having last tapped the bond market in December.

Sovereign bond yields have climbed 38 basis points to 7.04% since the Iran war began three months ago, and strategists expect further gains as markets price in monetary tightening. Rising benchmark yields have lifted corporate borrowing costs, dampening companies’ appetite for debt sales, even as the RBI is widely expected to keep its policy rate unchanged on Friday.

“At present, the bond market is significantly more expensive than bank loans,” said Subramanian Jambunathan, managing director and chief executive officer at Truhome Finance Ltd. Bank loans made up 37% of the mortgage lender’s funding mix as of December, he said. “It does not make sense for us to replace domestic borrowings with bond market funding.”

SBI, the nation’s top lender by assets, is seeing robust demand for credit from sectors such as power, renewables, data centers, Chairman CS Setty said at an event in Mumbai on Wednesday. 

The shift has been particularly visible among lower-rated borrowers, according to Ajay Manglunia, executive director at Capri Global Capital Ltd.

“Corporates, especially lower-rated, are getting a 60-70 basis point advantage by borrowing from banks rather than issuing bonds,” Manglunia said. He expects the trend to persist until the Middle East conflict is resolved.

Credit demand has exceeded deposit growth for eight straight months, with the gap widening to about 400 basis points as of May 15, the most in about two years. That’s putting pressure on banks to attract deposits as household savings flow into other investment products.

To bridge the shortfall, lenders are turning to short-term funding instruments such as certificates of deposit. As a result, rates on the six-month CDs climbed 88 basis points in May, the sharpest increase in four years.

“As the clamor for rate hike gains momentum, capital market yields are high and that is translating into higher bank credit growth,” said Karthik Srinivasan, senior vice president and group head at ICRA Ratings. “This is at a time when deposit mobilization in the banking system continues to be a challenge.”

(Updates with SBI Chairman’s comments in sixth paragraph.)

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Published on June 3, 2026