Banks May Lean More On Bond Raises In Q4 FY26 To Fund Increase In Loan Demand

Banks and financial institutions are expected to look towards the corporate bonds market during the ongoing final quarter of the financial year, as a means to fund the rise in demand for loans, according to debt market participants said. Amid tight banking system liquidity and despite rising bond yields, issuers are likely to tap the bond market to bridge the gap between credit and deposit growth.

“System liquidity is below 1 per cent of net demand and time liabilities (NDTL) since September. If banking system liquidity is not in significant surplus, deposit growth will not pick up,” says Gaura Sengupta, chief economist at IDFC First Bank.

Market participants say that credit-deposit ratio stands at an all-time high of around 82 per cent, and to bridge this gap, many lenders have resorted to short-term debt issuances. Data from the Reserve Bank of India (RBI) also show that outstanding issuances of certificated of deposits (CDs) by banks have increased 15 per cent to Rs 5.68 lakh crore by the end of December 2025 compared to a year ago.

However, in order to efficiently fund the rise in demand for loans, banks and financial companies are expected to come forward to raise corporate bonds.

Meanwhile, bond yields have been rising, with the 10-year government bond yield rising to near 10-month highs of 6.68 per cent, despite the RBI slashing the benchmark repo rate by 125 basis points (bps) in 2025. This is bound to incur higher costs of borrowing for lenders looking to raise bonds during the ongoing quarter.

Several issuers, such as Indian Bank had already postponed their bond issuances for the year to the final quarter due to higher market yields. However, as the gap between deposit and credit growth has widened due to fall in deposit rates, several issuers are likely to come tap the market, according t market participants. Indian Overseas Bank is set to raise a total of Rs. 1,000 crore with a 10-year bond issuance on January 22.

“Market dynamics have clearly shifted in the current cycle. Bond yields have hardened despite a reduction in the policy repo rate, reflecting factors beyond monetary easing. While systemic liquidity is comfortable, transmission into long tenure bond yields has remained limited. Banks are still expected to tap the bond market during this quarter. With a structural preference for long-term funding, bond issuances become the most viable funding option, even at elevated market rates," Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap, a debt advisory firm, told Economic Times.

Banks reported a credit growth of 11.40 per cent in 2025, while deposits lagged at 10.10 per cent. As on December 31, 2025, outstanding deposits totalled Rs 248.50 lakh crore, while credit amount stood at Rs 202 lakh crore, according to RBI data.