The Indian banking sector is experiencing a significant shift in its funding dynamics, with capital raised through key market channels—private placements of debt, qualified institutional placements (QIPs), and preferential allotments of equity—plummeting to its lowest level in three financial years. This pronounced contraction, as highlighted in the Reserve Bank of India’s (RBI) latest "Report on Trend and Progress of Banking in India 2024-25," signals a fundamental recalibration of balance sheet strategies by lenders amidst evolving macroeconomic conditions and liquidity management imperatives. The sharp reduction in market-based capital infusion reflects a complex interplay of monetary policy, bond market volatility, robust deposit growth, and cautious institutional appetite, compelling banks to reassess their reliance on external funding.
Provisional data from the RBI reveals a dramatic drop in fundraising activity. Up to November in the current financial year (FY26), banks across public, private, and foreign segments collectively mobilised a mere ₹58,912 crore through 17 issuances. This figure stands in stark contrast to the ₹1.49 trillion raised through 36 issues in FY25 and the ₹1.31 trillion secured via 40 offerings in FY24. The magnitude of this decline—a staggering reduction of over 96% compared to FY25—underscores a significant pivot away from these capital market routes, marking the lowest fundraising volume since FY23, which saw ₹1.23 trillion raised through 43 issues. This trend reverses a period of steady growth in market-based funding that characterized the banking sector from FY23 to FY25, when banks actively tapped these avenues to bolster their capital bases and support expanding credit portfolios.
A closer examination of the sectoral breakdown for FY26 (up to November) shows public sector banks (PSBs) accounting for the lion’s share of the limited capital raised, mobilising ₹40,719 crore through six issues. Private sector banks contributed ₹18,192 crore across 11 issues. Notably, foreign banks operating in India did not resort to the private placement route during this period, indicating either sufficient internal capital or alternative funding mechanisms. This pattern diverges from FY25, where PSBs were the primary drivers of market funding, raising a substantial ₹1.33 trillion, while private banks mobilised a comparatively smaller ₹16,419 crore. The dominance of PSBs in the reduced FY26 fundraising suggests that while overall market access has diminished, state-owned lenders still exhibited a residual need, albeit significantly scaled down, for external capital, potentially for specific growth initiatives or regulatory buffers.
Several critical factors are converging to drive this notable reduction in bank fundraising. Chief among them is the prevailing monetary policy environment and its impact on bond yields. Throughout much of FY26, elevated government bond yields, influenced by persistent inflationary pressures and the RBI’s hawkish stance, have made debt issuances less attractive for banks. Higher yields translate directly into increased borrowing costs, eroding the profitability of funds raised and potentially impacting net interest margins. Banks, therefore, adopted a cautious approach, preferring to defer issuances in anticipation of a potential easing of the interest rate cycle and a more favourable yield curve, which analysts widely expect in the latter half of the fiscal year. This strategic waiting game reflects a prudent balance sheet management approach, avoiding locking in long-term capital at suboptimal rates.
Complementing the yield-driven caution is a broader shift in liquidity conditions and deposit dynamics. Many banks, particularly larger private sector lenders, have reported robust deposit accretion in recent quarters. Following a period where credit growth consistently outpaced deposit mobilisation, creating a funding gap and necessitating external capital, deposit growth has begun to catch up, improving banks’ liability profiles. This "ample deposit accretion" reduces the immediate urgency for banks to seek high-cost wholesale funding. When banks have a strong and stable base of retail and corporate deposits, their need for market-based capital, especially for meeting day-to-day operational requirements and supporting loan growth, diminishes. This trend allows banks to rely more on internally generated capital and lower-cost deposits, thereby optimising their funding mix.
Moreover, the evolving funding needs of banks reflect a more cautious approach to balance sheet expansion. While credit growth remains robust, particularly in retail and certain segments of corporate lending, banks may be prioritising asset quality and risk management over aggressive growth fuelled by potentially expensive external capital. The regulatory environment also plays a crucial role; Indian banks have largely maintained strong capital adequacy ratios (CRAR) well above the Basel III minimums, thanks to continuous capital raising efforts in previous years and government recapitalisation of PSBs. This comfortable capital buffer might reduce the immediate pressure to raise fresh equity or Tier I/II debt, especially if internal accruals are sufficient to support moderate asset growth and meet regulatory requirements. The RBI’s consistent emphasis on robust capital buffers has instilled a culture of proactive capital management, ensuring banks are well-prepared for potential economic volatilities.
The subdued fundraising activity also has broader implications for the capital markets and the economy. For the capital markets, the reduced supply of bank-issued bonds and equity instruments means fewer investment opportunities for institutional investors, including mutual funds, insurance companies, and foreign portfolio investors, who often rely on these issuances for portfolio diversification and yield generation. For the economy, while the current slowdown in market funding is primarily driven by banks’ internal dynamics and market conditions rather than a lack of demand for credit, a sustained decline could, in the long run, impact the ability of banks to support credit expansion if deposit growth falters or economic activity accelerates beyond current projections. However, current assessments suggest that banks remain well-capitalised and liquid enough to meet the ongoing credit demand.
Looking ahead, market analysts and banking sector experts anticipate a potential revival in issuance activity during the second half of FY26. This optimism is predicated on several factors. Firstly, expectations of a pivot in the RBI’s monetary policy, potentially involving rate cuts, could lead to a softening of government bond yields. Lower yields would significantly reduce borrowing costs for banks, making debt issuances more attractive. Secondly, if credit demand continues to remain robust, particularly from sectors driving economic growth, banks might find it necessary to tap capital markets again to maintain optimal capital levels and support further lending. Furthermore, any unexpected regulatory changes or requirements for additional capital buffers could also prompt banks to return to the market.
In a global context, many banking systems have faced similar challenges with rising interest rates and tighter liquidity conditions in recent years. However, the Indian scenario is distinct due to its domestic growth trajectory and specific regulatory framework. While global banks have often grappled with capital shortfalls post-financial crises, Indian banks have generally maintained healthier capital positions, often exceeding international benchmarks. The current trend in India appears to be more of a strategic pause and recalibration rather than a crisis-driven scramble for capital. This measured approach allows banks to consolidate their balance sheets, enhance operational efficiencies, and position themselves for sustainable growth in the evolving economic landscape. The current period of reduced market funding, therefore, might be viewed not as a weakness, but as a strategic adjustment by a resilient banking sector navigating dynamic financial markets with prudence.
