Bonds vs. Bank Loans: Why Indian Companies Are Choosing Debt Markets in 2025

The Indian debt market in 2025 is experiencing a transformative shift, driven by a confluence of regulatory reforms, favorable economic policies, and evolving corporate financing strategies. The Reserve Bank of India’s (RBI) decision to cut the repo rate by 50 basis points on June 6, 2025, reducing it to 5.5% from 6.5% earlier in the year, has significantly lowered borrowing costs, making debt financing, particularly through bonds, more attractive.

This follows a series of rate cuts totalling 100 basis points in 2025, implemented in February, April, and June, which have fueled a surge in corporate bond issuances, reaching a record ₹9.9 trillion in FY25. Historically, Indian companies have relied heavily on bank loans for financing, but a marked shift towards debt markets, particularly corporate bonds, is reshaping the financial landscape.

Regulatory Environment

The Securities and Exchange Board of India (SEBI) and the RBI have played pivotal roles in fostering the growth of the corporate bond market through targeted reforms aimed at enhancing transparency, accessibility, and efficiency. These reforms have made it easier for companies to issue bonds and for investors to participate, contributing to the market’s expansion. Key initiatives include:

• Centralized Bond Data Portal: SEBI has established platform to provide comprehensive, real-time information on bond issuances, reducing information asymmetry and boosting investor confidence.

• Simplified Listing Processes: SEBI has streamlined the listing process for bonds, reducing the time and cost involved for companies issuing public bonds. For instance, the public comment period on draft offer documents has been cut to one day for listed issuers and five days for others.

• Reduced Minimum Investment: The minimum investment amount for bonds was lowered to ₹10,000, encouraging retail investor participation and broadening the market’s investor base.

• Partial Credit Enhancements: These mechanisms allow issuers to improve the credit quality of their bonds, making them more attractive to investors, particularly for companies with lower credit ratings.

Specific Regulatory Reforms Driving Bond Market Growth

Recent regulatory changes have further accelerated the bond market’s growth by making it more accessible and transparent:

• Reduction in Face Value: In 2024, SEBI reduced the minimum face value of corporate bonds to ₹10,000, down from ₹1 lakh in 2022 and ₹10 lakhs previously. This has significantly lowered the entry barrier for retail investors, leading to a 327% annual surge in retail bond transactions.

• Removal of Held-To-Maturity (HTM) Cap: In 2024, the RBI removed the 23% cap on banks’ investments in corporate and state bonds under the HTM category, allowing banks to increase their bond holdings and enhance market liquidity.

• Mandatory Disclosure Documents: Since 2023, SEBI has mandated the use of General Information Documents (GID) and Key Information Documents (KID) for bond issuances. These documents provide standardized information, protecting investors from misinformation and building confidence.

• Online Bond Platform Providers (OBPP): Introduced in 2022, the OBPP framework requires online bond platforms to register with recognized stock exchanges and conduct trades via a Request for Quote (RFQ) platform, simplifying the investment process and enhancing transparency.

• Request for Quote (RFQ) Platform: Launched in 2020 for institutional investors and expanded to retail investors in January 2023, the RFQ platform has facilitated 30% of corporate bond trading by 2023, reducing risks associated with over-the-counter (OTC) trading.

• Electronic Bidding Platform (EBP): Mandatory since 2016 for bond issues exceeding ₹50 crores, the EBP ensures price discovery and transparency in private placements, streamlining the issuance process.

These reforms have created a conducive environment for bond issuances, encouraging companies to tap debt markets over traditional bank loans.

Economic Factors

India’s economy in 2025 is characterized by robust growth, particularly in capital expenditure. According to the Ministry of Statistics and Programme Implementation, capex in FY 2024-25 increased by 20% year-on-year to ₹11 lakh crore, with intentions for FY 2025-26 set at ₹4.88 lakh crore. This capex revival, driven by investments in infrastructure, manufacturing, and digitalization, requires long-term financing, which bonds are well-suited to provide.

The RBI’s repo rate cuts have significantly enhanced the appeal of bonds. The June 2025 cut to 5.5% lowered bond yields, with AAA-rated corporate bonds offering yields between 7% and 8%, compared to equity market returns of around 15%. This has made bonds a cost-effective financing option compared to bank loans, which, despite reduced rates (e.g., Bank of Baroda and Punjab National Bank cut loan rates by 0.5% post-cut), often come with stricter terms and shorter tenures.

The inclusion of Indian government bonds in global indices like the J.P. Morgan GBI-EM and Bloomberg EM Local Currency Index has attracted significant foreign portfolio investments, with ₹1.21 Lakh crore invested in FY24, the highest since FY 2014-15. This influx of foreign capital has increased market liquidity, making the bond market more robust and appealing for corporate issuers.

Economic Factor

Impact on Bond Market

Repo Rate Cut (5.5%)

Lowered bond yields (7-8% for AAA bonds), reduced borrowing costs

Capex Revival

Increased demand for long-term financing, suited for bonds

Foreign Inflows

Enhanced liquidity, broader investor base

Inflation Easing

Inflation at 3.2% in April 2025, boosting bond attractiveness

Advantages of Bonds over Bank Loans

Bonds offer several distinct advantages over bank loans, making them a preferred choice for Indian companies in 2025:

1. No Dilution of Ownership: Unlike equity financing, bonds do not dilute shareholder ownership, allowing companies to raise capital without affecting control.

2. Flexibility in Structuring: Bonds can be tailored with bullet payments, step-up coupons, or floating rates to match cash flow needs, unlike rigid bank loan terms.

3. Faster Execution: Bond issuances can be completed in days, compared to weeks or months for bank loan approvals, especially for large amounts.

4. Tax Efficiency: Interest on bonds is tax-deductible, reducing taxable income and making bonds cost-effective.

5. Diversified Funding: Bonds reduce reliance on banks, spreading risk and ensuring access to capital during tight lending conditions.

6. Longer Tenures: Bonds offer maturities from a few years to decades, ideal for long-term projects like infrastructure, unlike shorter-term bank loans.

7. Broader Investor Base: Bonds attract institutional and retail investors, improving pricing and liquidity. 

However, bonds also carry risks, such as lower liquidity in the secondary market and higher credit risk compared to government securities. Despite these challenges, the advantages of bonds align well with the needs of companies seeking to fund large-scale projects or refinance debt in a low-interest-rate environment.

Institutional and Retail Investor Interest

The Indian bond market has seen increased participation from both institutional and retail investors. Institutional investors, including mutual funds, insurance companies, and pension funds, have significantly increased allocations to bonds, with debt mutual funds recording inflows of ₹11,983 crore in May 2025, up from ₹3,458 crore in April. Assets under management (AUM) in debt mutual funds rose by 14.5% from ₹1.71 lakh crore in December 2024 to ₹1.96 lakh crore in May 2025.

Foreign investors have shown strong interest, driven by the inclusion of Indian bonds in global indices, with foreign portfolio investments in corporate bonds growing 11.4% in FY25, from ₹1,08,00,000 crore to ₹1,21,000 crore. This has enhanced market liquidity and provided companies with access to a broader investor base.

Retail investor participation has surged, facilitated by platforms like AltiFi, an award-winning  SEBI-registered OBPP that enables individuals to invest in high-yield bonds from leading institutions, including financial institutions, corporates and startups. With a user-friendly interface and low minimum investments starting at ₹10,000, AltiFi is democratizing access to the bond market, supporting companies by expanding their investor pool.

Democratizing Bond Investments: The Role of Online Platforms

The rise of retail investor participation in the bond market is a significant development in 2025, driven by online bond platforms like AltiFi. This platform offer real-time trading, zero account opening and brokerage charges, and a seamless user experience, making bond investing accessible to a broader audience. For instance, AltiFi provides access to over 1,000 bonds, including government securities, corporate bonds, and other debt instruments..

Challenges and Risks in the Indian Bond Market

While the Indian corporate bond market has seen significant growth, it faces several challenges that could hinder its long-term development. One major issue is the lack of liquidity in the secondary market.

Credit risk is a significant concern, as corporate bonds carry a higher default risk compared to government securities. Investors must carefully assess the creditworthiness of issuers.

Future Outlook

The trend of favoring bonds over bank loans is likely to persist as India’s economy continues to grow, with capital expenditure projected to double to $800-850 billion in the next five years. According to CRISIL Ratings, the Indian corporate bond market is expected to more than double from approximately ₹43 lakh crore in FY24 to ₹100-120 lakh crore by FY30.

The inclusion of Indian bonds in global indices is expected to continue attracting foreign investment, further boosting liquidity. However, addressing challenges like secondary market liquidity and credit risk will be crucial for sustaining this growth. As platforms like Altifi.ai and others continue to democratize access to the bond market, retail investor participation is likely to increase, providing companies with a more diverse funding base.

In conclusion, the shift towards bonds in 2025 reflects a strategic response to a favorable economic and regulatory environment. Indian companies are leveraging the flexibility, cost efficiency, and broad investor appeal of bonds to meet their financing needs, positioning the corporate bond market as a cornerstone of India’s financial system in the years ahead.