Corporate borrowers are increasingly turning to banks as rising capital market yields erode the cost advantage of bond issuances. According to The Economic Times, faster repricing of corporate bond yields, compared with bank lending rates due to deposit repricing lags and relationship-based pricing, has sharply compressed spreads. CareEdge Ratings data shows that for AAA-rated NBFCs at the one-year tenor, the differential between bank lending rates and bond yields has narrowed to 156 basis points in March 2026 from 473 basis points in March 2021, a compression of about 67%. For AA-rated NBFC issuers, the spread has shrunk to 56 basis points from 358 basis points over the same period. This compression has fundamentally altered how India's top borrowers approach fundraising strategies.
The shift represents a significant market reversal for lower-rated borrowers. As reported by The Economic Times, for A-rated borrowers, bond market borrowing has become more expensive than bank funding, with the one-year spread turning negative at 151 bps for NBFCs and 111 bps for corporates as of March 2026. Even for top-rated corporate borrowers, the advantage has narrowed sharply. AAA-rated corporates at the 1-year tenor now have a spread of 168 bps down from 490 bps five years ago. According to Sanjay Agarwal, senior director at CareEdge Ratings, this move towards bank funding has supported liquidity and eased near-term refinancing, particularly for stronger corporates and NBFCs, while reducing execution risk from volatile market conditions. The shift also brings lower tenor diversification, greater exposure to floating rates and higher reliance on banks, as noted by Agarwal.
The shift reflects broader movements in sovereign yields, with government securities (G-sec) yields rising significantly. As reported by The Economic Times, government securities yields have risen from about 3.8% at the one-year tenor and 6.4% at the 10-year tenor in March 2021 to around 7% across tenors by March 2026, with the increase concentrated at the short end, resulting in a relatively flat yield curve. This substantial alteration in borrowing dynamics has affected both NBFCs and corporates significantly. Despite the shift, the bond market retains structural advantages, providing access to a broader investor base including pension funds, mutual funds and insurance companies, and remaining relevant for longer tenors.
The change in borrowing dynamics reflects broader market conditions and credit quality assessments. According to Prakash Agarwal, partner at Gefion Capital, as reported by The Economic Times, rising interest rates, wider credit spreads and tighter liquidity have reshuffled India's debt funding landscape. The cost advantage that non-convertible debentures once offered has narrowed sharply, with A-rated issuers facing a reversal entirely. For lower-rated borrowers, bank lending rates include spreads over marginal or reference rates that widen as credit quality declines, partially offsetting the relative disadvantage of bank borrowing. However, if elevated rates persist and bank funding costs continue to converge with bond yields, entities with weaker leverage or thinner cash flows could face mounting refinancing and margin pressures. The net effect is a visible pivot toward bank borrowings among NBFCs and corporates, with bond market access increasingly a function of credit quality rather than a default funding choice.
