Companies give Bond Street a pass, take bank route for funds
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 (bps) from 358 basis points over the same period. 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.
Corporate borrowers are increasingly favoring bank loans over bond issuances as rising capital market yields diminish the cost advantage of bonds. Spreads between bank lending rates and bond yields have significantly compressed, particularly for higher-rated entities, leading to a notable shift in fundraising strategies.
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.
“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,” said Sanjay Agarwal, senior director, CareEdge Ratings.
AgenciesChanges in Borrowing Dynamics
“The shift also brings lower tenor diversification, greater exposure to floating rates and higher reliance on banks,” said Agarwal.
The shift reflects broader movements in sovereign yields. Government securities (G-sec) 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 has substantially altered borrowing dynamics for both NBFCs and corporates.
Despite this, the bond market retains structural advantages. It provides access to a broader investor base, including pension funds, mutual funds and insurance companies, and remains relevant for longer tenors.
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. But 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.
“Rising interest rates, wider credit spreads and tighter liquidity have reshuffled India’s debt funding landscape,” said Prakash Agarwal, partner, Gefion Capital. “The cost advantage that non-convertible debentures once offered has narrowed sharply – and for A-rated issuers, reversed entirely. For AA-rated borrowers, the edge over bank funding remains, but only marginally. 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.”
