After a subdued first half marked by geopolitical headwinds and tepid project activity, corporate lending by banks is poised for a revival in the second half of FY26. The Reserve Bank of India’s (RBI) recent policy measures, coupled with government’s implementation of Goods and Services Tax (GST) 2.0, are expected to unlock fresh credit demand from India Inc.
“Lending to corporates will pick up in the second half as infra spending was low due to the monsoon. With the noise around US tariffs settling down and the GST cut, we believe spending will go up,” said a senior executive at the Tata Group.
C S Setty, chairman, State Bank of India said post-policy to television channels that he expects the credit growth to improve by 1%-2% from the earlier estimated 11%-12%.
Vivek Iyer, Partner and Financial Services Risk Leader at Grant Thornton Bharat, believes the shift away from a US-centric global order could support domestic investment. “We expect this to bear fruit in the second half of the year, giving corporates better visibility on the future outlook, reviving their investment plans and thereby increasing lending, substantially picking up in Q4,” he said.
Even the RBI governor Sanjay Malhotra is bullish. As he reaffirmed on policy day, “Yes, we are seeing healthy pick-up in Q1, and demand is strong across several sectors like cement, auto, and others, which are showing encouraging signs of capex activity. Overall, we remain confident that private capex will continue to revive in the coming quarters.”
Policy push for credit expansion
On Thursday, the RBI came out with a slew of measures to improve credit flow. These included, allowing banks to fund acquisitions by Indian firms and expanding lending against shares, REITs, and InvITs. Further, non-banking financial companies (NBFCs) will get relief for investing in operational and high-quality infrastructure projects through lower risk weights. To improve credit to micro, small and medium enterprises and residential real estate, risk weights to these segments are likely to be reduced.
These measures, along with an acknowledgment that the RBI is keeping the door open for further rate cuts, is expected to give more confidence to both bankers and India Inc.
Amit Kumar Sinha, MD & CEO of Mahindra Lifespace Developers, stated the falling interest rates and GST reforms as tailwinds. “A 50 basis points (bps) rate cut in June and GST 2.0 will drive consumption, leading businesses to invest more in capex. This will create opportunities for companies to access both banks and capital markets,” he said. “The steam in equity markets is not lost yet. Most corporates may continue to seek an optimal balance between the two.”
Credit flow to India Inc has slowed down for some time. According to EY India, bank advances to corporates registered a modest 3% YoY growth in FY25, while lending to large corporates was nearly flat at 0.21% over the last four quarters ending Q1FY26. However, the RBI projects private sector capital investment to Rs 2.67 lakh crore in FY26, supported by strong macro fundamentals and healthier corporate balance sheets.
However, some believe that there may not be a capex boom. A senior banker noted that the narrowing gap between nominal GDP growth and borrowing costs is a classic capex killer. Capex growth of BSE500 companies last year was just 8%, lagging nominal growth. “The investment-to-GDP ratio has been stuck at 30% for four years. There’s no breakout momentum. Project sanctions are down 10%. You can’t have a loan boom without a project boom first,” he said.
Cautious reality: Hurdles to a broad-based boom
Another banker from a state-run bank said, “It’s not that banks are hesitant to lend to all corporates. Forty percent of all new sanctions last year were in the power sector, and states like Gujarat and Maharashtra are vacuuming up most of the investment. Banks are eager to lend to strong, investment-grade companies in hot sectors. The hesitation is for stressed corporates, volatile sectors, or complex balance sheets.”
Post-NPA crisis, banks have become more disciplined. “Corporate NPAs are at a decade low, and banks are fiercely protective of that. If a deal doesn’t meet their strict structure or security requirements, they will walk away,” the PSU banker said.
Most expect that a broad-based lending boom is still far away. A Mumbai-based executive director added, “Banks are lending to only the top 200 groups. What happens to the others? The vacuum is being filled by special situations funds lending at 15–20%. Statistically, lending will rise if large corporates start borrowing, but it won’t be broad-based.”
EY’s Pratik Shah expects large corporates to adopt a diversified funding mix, blending bank loans with corporate bonds, ECBs, and private credit. “Alternative channels will remain important due to their flexibility and pricing. But banks can reclaim share by offering tailored solutions like project finance, structured credit, and working capital facilities,” he said.
For MSMEs, banks are likely to remain the primary source of credit. “Access to bond markets or private equity is limited for them,” Shah added. Agreeing with him Iyer added, “For equity, private equities will play a major role. For debt, banks will remain central, as India’s corporate debt market still needs deepening.”
As H2 unfolds, the interplay of policy support, sectoral momentum, and cautious optimism may shape a more nuanced revival, one that’s gradual, selective, and structurally different from past credit cycles.