Companies are likely to borrow just over R3.5 lakh crore through plain vanilla bank loans in FY14 with credit offtake by the corporate sector expected to be higher by just 11% over last year. Instead, they may access the non-convertible debenture (NCD) and commercial paper (CP) markets for more than twice this amount since senior bankers including CEOs of the country?s largest banks have observed that it might not be possible to cut lending rates soon, given that liquidity conditions remain somewhat tight and that deposit growth is sluggish. At a time of abundant global liquidity, companies ? especially those which need to use funds overseas or those that have a natural hedge in the form of exports ? will also tap overseas bond markets.

Indeed, this could be the third year in a row in which Indian companies will end up borrowing far more through CPs and debentures to take care of their funding needs rather than through bank loans. In FY13, Indian companies picked up close to R7.5 lakh crore through bonds, debentures and CPs whereas banks loaned them a little over R4 lakh crore.

In the year before that, they tapped the NCD and CP markets for close to R5.5 lakh crore and banks for only R4.7 lakh crore.

Of course, banks are players in the CP market; this route is used to lend to top-quality borrowers at a rate that could be lower than the base rate and banks need to mark these to market. Currently, State Bank of India?s base rate is 9.70%, HDFC Bank?s is 9.6% and ICICI Bank?s base rate is 9.75%. Base rates of other banks range between 10% and 10.5%.

However, CPs can be issued by companies at around 8.00-8.20% for a three-month period or 8.50-9.00% for one year. In FY13, the Reserve Bank of India (RBI) cut its policy rate by 100 basis points, which resulted in a fall of 100-150 bps in CP rates and 100 bps across tenures in long-term bonds. However, most banks cut their base rates by just 25-50 bps.

At the end of March 2013, outstanding CPs were R1.09 lakh crore, up 9% over the previous year. In April so far, companies have already raised over R20,000 crore through CPs, according to Prime Database.

Ajay Manglunia, head of fixed income, Edelweiss Securities, expects at least a 15% rise in bond issuance and an even higher increase in CP issues this year. Manglunia said the CP market was becoming increasingly more liquid with larger issuances. However, the NCD market remains fairly illiquid, with buyers typically holding on to the paper till maturity. Last year, large companies such as Hindalco and Sterlite Industries mopped up money through bond issuances.

According to BofA Merrill Lynch, corporate loan growth may see the biggest fall in FY14 to potentially below 11%. The reason for this is that much of the growth so far has been supported, in part, by drawals from the existing project pipeline, which is drying up. Approvals for fresh projects have dropped to 50-70% over last year with companies going slow on investments.

BofAML points out that infrastructure and capital expenditure contributed to almost 50% of the loan increase during FY13.