The Reserve Bank of India (RBI) logo is pictured outside its head office in Mumbai
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DANISH SIDDIQUI
Given strong bank balance sheets, a revival in private investment can potentially drive increased demand for bank credit, according to a RBI study, ‘Drivers of Firm Demand for Credit’.
Bank credit growth remains in double digits, albeit with some moderation (to 12.1 per cent in FY25 from 16.3 per cent in FY24).
“Sales growth, pre-Covid, positively correlates with bank borrowing for expansion, though this relationship weakened post-Covid.
“Firms with better liquidity and ICR (interest coverage ratio) borrow more, reflecting stronger financials, while highly leveraged firms borrow less on aggregate, potentially deleveraging or facing funding constraints. Higher domestic growth increases overall funding demand for business activity,” RBI staffers said in the study published in the latest annual report.
Overall, firm-specific factors, macroeconomic conditions, and relative funding costs are key borrowing determinants, varying across sectors and time, they opined.
“Higher relative bank loan costs drive firms, especially in services, towards cheaper market-based funding. Firms with non-bank funding access are more sensitive to these cost differences, increasing total borrowing when bank loans become expensive,” the staffers said.
Regression results indicate that larger firms are less likely to borrow, which could be due to better availability of internal resources.
Older firms, while using less bank credit, have higher total debt, likely using non-bank funding for expansion or refinancing, per the officials’ assessment.
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Published on May 29, 2025
