Corporate finance: India’s commercial banks start FY 2025-26 in enviable shape. Their aggregate capital-adequacy ratio hovers above 16%, bad-loan levels have fallen to a decade low of about 3%, and liquidity remains comfortable after the Reserve Bank of India (RBI) cut its policy rate by a cumulative 50 basis points since February. RBI Governor Sanjay Malhotra insists the sector is “fully capable of meeting the investment appetite of India Inc” as the economy gears up for its next expansion cycle.
Yet, as Governor Malhotra conceded at a recent CII–USISPF forum, those sturdy balance sheets do not insulate banks from a rapidly shifting risk matrix at home and abroad. The upshot: while lenders are willing, their capacity to write the cheques that will power India’s $6 trillion ambition is under pressure.
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Across the world, banks are wrestling with a nasty mismatch between their short-term deposits and the long-dated project loans corporates crave. The steep rate hikes of 2022-24 have amplified duration risk, eroding net interest margins just as prudential rules such as Basel III’s “end-game” package and IFRS 9’s expected-credit-loss model force banks to book lifetime losses on Day One.
Meanwhile, private-credit funds and bond markets are poaching the highest-quality borrowers with covenant-light capital, further shrinking the spread banks can demand. Add the geopolitical jitters over the Red Sea and Ukraine, plus the spectre of fresh US tariffs, and treasury desks everywhere are tightening the valve on big-ticket corporate credit.
Domestic constraints: Old scars, new rules
India’s own scars from the last capex boom still itch. Yes, gross NPAs have tumbled, but much of that clean-up came via write-offs rather than recoveries, leaving boards cautious about fresh exposure to steel, telecoms and infrastructure. The RBI’s impending shift to an expected-credit-loss regime—now slated for March 2026—will oblige banks to front-load provisions, potentially shaving 50-80 basis points off tier-1 capital on every new loan.
A parallel draft framework proposes graded provisioning of up to 5% for project loans that miss construction milestones, threatening to push otherwise viable ventures below internal hurdle rates. Concentration caps also bite: a single corporate group cannot absorb more than 20% of a bank’s tier-1 capital (25% with board nod), forcing mega deals into complex syndications or the still-shallow domestic bond market.
And while the National Bank for Financing Infrastructure and Development was meant to take long-gestation assets off commercial-bank books, progress has been slow. With public-sector banks parking more than a quarter of their assets in government securities to meet statutory and prudential liquidity norms, sovereign borrowing effectively crowds out private capital just when India’s highways, renewable parks and semiconductor fabs need it most.
A crowded field—and a crowding-out risk
Competition, too, has intensified. Non-banking financial companies (NBFCs) and fintech platforms snap up high-yield retail and SME borrowers, leaving banks to fight for slimmer-margin corporate mandates. Retail loans—credit cards, personal loans, mortgages—have grown almost twice as fast as corporate credit in the past three years and carry higher spreads. It is easy to see why treasury chiefs tilt their books toward consumers rather than factories.
For India Inc the message is blunt: bring more equity to the table or be prepared to pay up. Banks now demand promoter contributions of 30-40% for many greenfield projects, shortening average loan tenors to five-seven years and pushing refinancing risk onto borrowers. Complex deals—cross-border cash flows, heavy environmental clearances, take-or-pay contracts—attract steep internal capital charges, making blended finance or multilateral guarantees essential. Offshore funding will fill part of the gap, but global liquidity is volatile and far from cheap.
Lenders are hardly standing still. A clutch of state-owned and private banks has begun piloting sustainability linked loans and green bonds, channelling capital toward renewables, green hydrogen and circular-economy ventures. Syndicated structures and asset-backed securitisation are being revived to disperse risk and free up balance-sheet space.
Digitisation offers another lever. By partnering with fintechs that mine alternative data—GST invoices, e-commerce flows, utility payments—banks can underwrite SMEs and start-ups that lack hard collateral but drive employment and innovation. The RBI, for its part, is weighing a calibrated roll-out of higher liquidity buffers for volatile digital deposits so that the cure does not starve the patient of loanable funds.
Corporate finance: Kick-starting the virtuous cycle
Finance secretary Tuhin Kanta Pandey has dangled an extra Rs 1 lakh crore in post-Budget disposable income as a spur to consumption-led investment, while industrialists such as Kumar Mangalam Birla urge peers to “match the government’s five-fold surge in capex.” Ratings agency ICRA believes private-sector spending will remain cautious through the first half of FY 2025 but could accelerate on the back of production-linked incentives and easing global rates.
Ultimately, bridging the trillion-dollar funding gap will require deeper corporate-bond and credit-default-swap markets, faster roll-out of true development-finance institutions, and calibrated regulatory sequencing so that well-intended safeguards do not choke credit. Until then, banks will keep one foot on the accelerator and the other hovering nervously over the brake.
The lenders have the buffers to bankroll another investment super-cycle, but a storm of tighter global regulation, evolving RBI norms and lingering risk aversion is narrowing their room for manoeuvre. Companies that diversify funding sources—mixing bank debt with bonds, private credit and equity—stand the best chance of keeping their growth ambitions on track while the banking system recalibrates for a more demanding era.