The financial landscape for Indian businesses is undergoing a profound transformation. Historically, bank loans have been the cornerstone of corporate financing in India, providing a reliable, if sometimes costly, source of capital. However, in recent years, there has been a noticeable pivot toward corporate bonds as businesses seek to diversify their funding sources and capitalise on potentially lower borrowing costs. This shift is driven by a combination of regulatory reforms, favourable economic conditions, and technological advancements that are making bond markets more accessible. The Reserve Bank of India’s (RBI) recent repo rate cut to 5.50% in June 2025 has further influenced this dynamic, potentially lowering borrowing costs across both loans and bonds.
Bank Loans vs. Bonds: A Comparative Analysis
To understand why Indian businesses are increasingly turning to bonds, it’s essential to compare the characteristics, advantages, and disadvantages of bank loans and bonds.
Bank Loans
Bank loans involve a direct agreement between a business and a bank, where the business borrows a sum of money and agrees to repay it with interest over a specified period. These loans can be short-term or long-term, secured (backed by collateral) or unsecured, and are often tailored to the borrower’s needs.
Advantages of Bank Loans
- Accessibility for SMEs: Small and medium-sized enterprises (SMEs) often find bank loans more accessible than bonds, especially if they lack the credit rating or scale required for bond issuance. Banks are familiar with local businesses and can offer loans based on established relationships.
- Flexible Terms: Loan agreements can be customised, offering options like revolving credit lines, term loans, or overdraft facilities to suit specific business needs.
- Relationship Benefits: Regular interactions with banks can lead to better loan terms, additional financial services, or support during financial difficulties.
Disadvantages of Bank Loans
- Higher Interest Rates: For businesses with lower credit ratings, bank loans can carry higher interest rates compared to bonds issued by highly rated companies. Rates are often tied to the bank’s cost of funds, which can be influenced by the RBI’s repo rate.
- Restrictive Covenants: Banks may impose strict conditions, such as financial covenants or restrictions on business operations, limiting a company’s flexibility.
- Refinancing Risks: Short-term loans require periodic refinancing, which can be challenging if market conditions deteriorate or if the business’s financial health weakens.
Bonds
Bonds are debt securities issued by businesses or governments to raise capital from investors. When a company issues a bond, it borrows money from investors and promises to pay periodic interest (coupon payments) and return the principal upon maturity. Corporate bonds in India are typically issued by large corporations or public sector undertakings (PSUs) and traded in financial markets.
Advantages of Bonds
- Lower Borrowing Costs: For companies with strong credit ratings, bonds often offer lower interest rates than bank loans, as they tap into a broader investor base willing to accept lower yields for perceived safety.
- Longer Tenors: Bonds can have maturities ranging from a few years to decades, making them ideal for funding long-term projects like infrastructure or research and development.
- Diversified Funding: Bonds allow businesses to access capital from a wide range of investors, including institutional investors, retail investors, and foreign portfolio investors, reducing reliance on a single lender.
- No Ownership Dilution: Bonds do not require giving up equity, allowing business owners to retain control.
Disadvantages of Bonds
- Credit Rating Barrier: Issuing bonds typically requires a credit rating, which can be a hurdle for smaller or less creditworthy firms. The rating process can be costly and time-consuming.
- Market Dependence: The success of a bond issuance depends on market conditions, which can be volatile due to economic or geopolitical factors.
- Regulatory Compliance: Issuing bonds involves adhering to SEBI regulations, including disclosure requirements and listing obligations, which can increase costs and complexity.
In India, bank loans have traditionally dominated due to their accessibility and the banking sector’s extensive reach. However, the bond market is gaining traction, particularly for large corporations and PSUs, as it offers competitive rates and longer-term financing options.
The Evolving Funding Landscape
The shift from bank loans to bonds in India is not a sudden phenomenon but the result of several interconnected factors that are reshaping how businesses finance their operations.
Regulatory Reforms
The Securities and Exchange Board of India (SEBI) has been instrumental in promoting the corporate bond market. Key initiatives include:
- Simplified Issuance Processes: SEBI has introduced electronic book-building platforms, reducing the complexity and cost of issuing bonds.
- Enhanced Transparency: Mandatory disclosures and standardised reporting have increased investor confidence in the bond market.
- Retail Participation: The minimum investment size for corporate bonds has been reduced from ₹10 lakh to ₹10,000, making bonds more accessible to retail investors.
- Bond Indices: SEBI’s introduction of bond indices has provided benchmarks for investors, facilitating better decision-making.
These reforms have made the bond market more attractive for both issuers and investors, encouraging businesses to explore bonds as a funding option.
Interest Rate Environment
The RBI’s monetary policy significantly influences borrowing costs. The RBI cut the repo rate to 5.50% on June 6, 2025. The repo rate is the rate at which the RBI lends to commercial banks, directly affecting the cost of bank loans. A lower repo rate reduces borrowing costs for banks, which can pass on these savings to businesses. However, for companies with high credit ratings, bonds often offer lower yields than bank loans, especially in a low-interest-rate environment. This makes bonds an attractive option for large corporations seeking cost-effective financing.
Diversification of Funding Sources
Relying solely on bank loans can expose businesses to risks, particularly during economic downturns when banks may tighten lending standards. By issuing bonds, companies can diversify their funding sources, accessing capital from institutional investors, retail investors, and foreign portfolio investors. This diversification reduces dependence on banks and mitigates risks associated with fluctuating lending conditions. As per CRISIL report, only 43% of domestic borrowings by India’s top 500 companies come from corporate bonds, and 57% from banks and financial institutions, indicating room for growth in bond financing.
Growth of the Bond Market
The Indian corporate bond market has seen significant growth. As of March 2025, the market was valued at approximately ₹64 lakh crore, with ₹53 lakh crore in long-term bonds and ₹11 lakh crore in short-term bonds. In FY24, corporate bond issuance reached ₹7.3 lakh crore, and in the first half of 2025, companies raised ₹6.6 trillion through bonds. This growth is driven by increased demand from investors seeking stable returns and the need for long-term capital for infrastructure and other projects. A CRISIL report from 2023 projected that the bond market could double to ₹100-120 lakh crore by 2030, reflecting its potential to become a major funding source.
Technological Advancements
Digital platforms are transforming the bond market by making it more accessible to retail investors. Platforms like Altifi.ai allow investors to browse and invest in bonds online, lowering the entry barriers that once limited bond investments to institutional players. This increased accessibility is boosting demand for corporate bonds, encouraging more businesses to issue them.
Funding landscape for Indian businesses
Several recent developments are shaping the funding landscape for Indian businesses in 2025.
Repo Rate Cut and Its Implications
On June 6, 2025, the RBI reduced the repo rate by 50 basis points to 5.50%, marking the third rate cut in the calendar year. This followed a cut from 6.50% to 6.25% in February 2025. The lower repo rate reduces the cost of borrowing for banks, which can lead to lower interest rates on loans for businesses. For businesses, this creates a favourable borrowing environment, but bonds may remain more attractive for companies with strong credit profiles due to potentially lower yields.
The repo rate cut also affects the bond market. As interest rates fall, bond yields typically decrease, increasing the prices of existing bonds. For new bond issuances, lower yields mean businesses can borrow at reduced costs, making bonds a competitive alternative to bank loans. However, some companies may prefer loans if banks pass on the rate cuts more aggressively, as suggested by industry analysts.
Bond Issuance Trends
The corporate bond market has shown robust growth. In FY24, bond issuance crossed ₹7.3 lakh crore, driven by high-rated companies issuing bonds through private placements. In the first half of 2025, companies raised ₹6.6 trillion, though a slowdown is anticipated due to global uncertainties and a potential pause in RBI rate cuts. Despite this, the bond market remains a vital funding source, particularly for infrastructure and long-term projects.
Altifi.ai: Democratising Bond Investments
SEBI-registered online bond platform providers like Altifi.ai are playing a pivotal role in the evolving funding landscape by making bond investments accessible to retail investors. Altifi.ai, part of Northern Arc Capital, offers a user-friendly platform for investing in high-yield bonds and debt securities from various issuers, including PSUs, financial institutions and corporates.
Key Features of Altifi.ai
- Curated Investment Options: Altifi.ai provides a selection of vetted bonds, ensuring quality and transparency for investors.
- High Returns: The platform offers bonds with internal rates of return (IRRs) of 7% or higher, surpassing traditional fixed deposits.
- Ease of Access: Investors can browse and invest in bonds through a digital interface, simplifying the investment process.
- Diversification: By offering bonds from diverse sectors, Altifi.ai helps investors build balanced portfolios.
Since its launch in 2021, Altifi.ai has facilitated investments in fixed-income securities that were previously available only to institutional investors. Its parent company, Northern Arc Capital, has managed over ₹1.50 trillion in financing, impacting millions across India. By increasing retail participation, Altifi.ai is boosting demand for corporate bonds, which in turn encourages businesses to issue more bonds to meet this demand.
Conclusion
The funding landscape for Indian businesses is shifting from a heavy reliance on bank loans to a more balanced approach that includes corporate bonds. Regulatory reforms by SEBI, favourable interest rates following the RBI’s repo rate cut to 5.50% in June 2025, and the further growth of the bond market are driving this change. While bank loans remain dominant, with an estimated ₹188.41 lakh crore in private sector credit, bonds are gaining ground, particularly for large corporations and PSUs seeking cost-effective, long-term financing.
Platforms like Altifi.ai are further accelerating this shift by making bond investments accessible to retail investors, thereby increasing market liquidity and demand. As India’s economy continues to grow, projected to reach $8 trillion by 2030, the corporate bond market is poised for further expansion, potentially doubling to ₹100-120 lakh crore by 2030. Businesses and investors alike must stay informed and adapt to these changes to capitalise on the opportunities presented by this evolving landscape.
