New Delhi, Apr 29: After reporting a dip in the financial year 2024-25, banks in India regained their dominant position in the country’s flow of funds during the subsequent Financial Year 2025-26, according to a Bank of Baroda research note released today.
The Banks accounted for 65.4 per cent of the Rs 44.67 lakh crore channelled to productive sectors, it said.
The rebound follows a dip in FY25, when banks’ share had fallen to 55.9 per cent as non-bank credit sources gained ground.
In FY24, banks had accounted for 64.5 per cent of the total flow of funds. The latest recovery indicates that lenders were able to re-establish their role as the principal source of financing for businesses and productive activities.
The report attributed the improvement partly to a relatively lower interest rate environment in FY26, which worked in favour of banks after they transmitted a significant portion of the repo rate reductions to borrowers.
Lower lending rates are understood to have improved the attractiveness of bank credit compared with alternative funding channels.
Among domestic non-bank sources, the composition of financing also shifted. Equity issuances, which had surged in FY25 amid buoyant stock markets and high-premium offerings, lost momentum in FY26 as market sentiment turned bearish and benchmark indices declined on a year-on-year basis.
Consequently, equity’s share in total flow of funds dropped to 7.7 per cent in FY26 from 11.4 per cent in FY25.
Meanwhile, the bond market benefited from the softer rate environment. The share of bonds, excluding financial institutions, rose from 4.2 per cent in FY25 to 6.7 per cent in FY26, suggesting stronger appetite for debt fundraising among corporates.
The report also noted that the share of NBFCs in the funding mix has declined over the past two years, while housing finance companies recorded a lower share due to consolidation within the sector following mergers with banks.
Foreign funding sources continued to gain traction, with their share in total flow of funds rising steadily from 6.8 per cent in FY24 to 11 per cent in FY26. Foreign direct investment remained the dominant component of external financing, increasing from 6.2 per cent in FY24 to 7.3 per cent in FY26.
The research note said India’s growth prospects and large domestic demand base continue to make the country an attractive destination for foreign capital. However, external commercial borrowings remained subdued, accounting for less than 1 per cent of the total in each of the last three years, reflecting currency volatility and uncertain global rate conditions.
Looking ahead to FY27, the report expects banks to retain their leading position in the borrowing landscape, supported by India’s projected GDP growth of around 7 per cent. Corporate bond issuances are also likely to remain resilient among higher-rated companies, while equity fundraising may stay cautious amid geopolitical uncertainty and unsettled markets. (BVI)
