ICRA has forecast incremental credit flow in the Indian economy from domestic sources to moderate in FY2025 even as domestic bond issuances are expected to rise further.

The rating agency estimated the incremental credit flow from domestic sources (bonds, non-food bank credit/.NFBC and Commercial Papers/CPs) to moderate to ₹24.5 lakh crore in FY2025, from the all-time high of ₹25.4 lakh crore achieved in FY2024.

However, bond issuances are expected to increase further in FY2025 to ₹10.6 lakh crore from ₹10.2 lakh crore in FY2024.

The agency underscored that the recent regulatory actions on unsecured retail loans, bank funding for NBFCs and tight liquidity in the banking system may constrain the incremental credit growth of banks.

However, the yield on Indian Government Bonds (IGBs) is likely to remain range-bound, driven by demand from foreign portfolio flows upon inclusion of IGBs in global indices.

This will improve the competitiveness of funding from debt capital markets vis a vis bank borrowing and would drive up corporate bond issuances.

As the interest rates are likely to remain elevated in developed markets, the domestic debt capital market would remain an attractive source of borrowings for large corporates, per an analysis by ICRA of credit flow.

Sachin Sachdeva, Vice President & Sector Head, ICRA expects the conditions for corporate bond issuances to remain conducive for both the issuers and the investors in FY2025, which is likely to drive the bond issuance to higher levels.

“Growth is expected to eventually taper off from these levels on the back of tight liquidity, even as the foreign flows in IGBs will remain supportive for growth in corporate bond issuances. Accordingly, ICRA estimates incremental total credit (bonds, non-food bank credit and CPs) expansion to dip to ₹24.5 lakh crore in FY2025,” Sachdeva said.

He assessed that the corporate bond outstanding is likely to increase to ₹50.3 lakh crore by end-March 2025, (from 46.0 lakh crore as on March-end 2024), translating into a year on-year (y-o-y) growth of 9.5 per cent.

The agency opined that competitive funding conditions in domestic markets compared to developed markets meant that large corporates tapped more domestic funding sources over the last two years.

ICRA noted that strong demand for loans from retail borrowers and non-bank finance companies (NBFCs) drove a significant portion of the incremental flow of credit from banks.

This resulted in the highest ever NFBC expansion of ₹22.3 lakh crore (excluding impact of merger of HDFC with HDFC Bank) in FY2024 far outpacing the incremental NFBC expansion of ₹18.2 lakh crore recorded in FY2023.

The agency assessed that incremental credit flow was also supported by the all-time high corporate bond issuances of ₹10.2 lakh crore in FY2024 (y-o-y +16.9 per cent), resulting in the stock of corporate bonds outstanding rising to an estimated ₹46.0 lakh crore (+6.6 per cent y-o-y) as on March 31 2024, from ₹43.1 lakh crore as on March 31 2023.

Besides, the stock of commercial papers (CPs) outstanding also rose by ₹40,000 crore in FY2024 to ₹3.9 lakh crore as on March 31 2024. Cumulatively, these three sources accounted for ₹25.4 lakh crore of incremental credit flow in the domestic market, an all-time high.