India Inc keeps PSU bank credit on hold

The catch: companies are not dipping into the money just yet, with muted capex, cheaper money market options, and ongoing repayments holding back actual disbursements, leading to weak corporate loan growth for banks in the first quarter of FY26.

For instance, State Bank of India chairman C.S. Setty told mediapersons in the Q1 earnings call earlier this month that for SBI, utilisation of working capital lines by companies fell from 62% in Q1 FY25 to 58% in Q1 FY26.

While most factors remain common for both private and PSU banks, private banks in their Q1 earnings calls cited aggressive pricing competition from PSU banks as another factor for muted demand for loans from India Inc.

However, despite the aggressive pricing and strong pipeline of sanctioned loans, PSU banks are seeing weak demand for actual loan disbursements.

According to Setty, self-supported growth combined with the shift towards market borrowing, including large corporates raising funds through short-term commercial papers (CPs), is replacing working capital demand, though this largely pertains to completed projects and not ongoing project finance.

He pointed out that in a rate reduction cycle, refinancing happens every time the rates get reduced. “Some of the reduction also has happened because of prepayments,” Setty said.

He said SBI has almost ₹7 trillion worth of corporate credit proposals in the pipeline—about ₹3.89 trillion in pending sanctions and ₹3.41 trillion in pending disbursements—in a mix of project finance and balance sheet funding. “But the disbursements are taking time while the repayments are actively being done,” he said.

Punjab National Bank’s (PNB’s) managing director Ashok Chandra had told Mint in the beginning of August that the bank’s sanctioned credit included project finance loans where disbursements are happening in phases and are likely to pick up in one or two years.

The country’s second largest state-owned bank had sanctioned corporate loans worth ₹43,000 crore where disbursements were yet to happen as of 31 March 2025. In FY26 so far, the bank has sanctioned loans worth ₹48,000 crore, and has approved loans worth another ₹38,000 crore where the documentation and processing are pending.

Put together, the bank had ₹1.3 trillion of sanctioned corporate loans for which disbursements will happen in a phased manner, Chandra said. PNB’s corporate loan portfolio grew 6.9% on-year and 1.1% on-quarter to ₹4.7 trillion as of 30 June.

Bank of Baroda’s managing director and chief executive officer Debadatta Chand in the lender’s earnings call had said that significant downward movement in bond market rates has led to lower bank loans.

According to SBI’s Setty, while the impact of higher US tariffs is expected to be limited, it is the general geopolitical uncertainty over the past two years that is making corporations go slower on expansion.

“Most of the tariff issues would affect SMEs more than large companies,” said Madan Sabnavis, chief economist, Bank of Baroda. “A strong level on sanctions means it’s going to become a disbursement in the course of time, so it’s a very positive sign, and probably the larger companies are preferring to go to PSU banks due to some advantage in terms of the cost.”

Areas of credit demand

Existing demand for corporate loans is being driven by multiple sectors.

PNB identified renewable energy as a key driver, and classified it as a “champion sector”, according to Chandra, who said that demand is also coming from segments such as defence, HAM (hybrid annuity model) road projects, power, data centres, infrastructure investment trusts (InvITs), and lease rental discounting. The bank is also seeing some project finance demand from the petroleum sector.

Bank of Baroda’s Chand said growth is being seen across sectors, including from NBFCs (non-banking finance companies), which had seen some de-growth in the past year due to higher risk weights.

Notably, in November 2023, the Reserve Bank of India (RBI) had increased the risk weights on banks’ unsecured retail loans and loans to NBFCs by 25 percentage points to 125%. This was partly reversed in February 2025, when the central bank reverted to 100% risk weights for bank loans to NBFCs.

This is leading to demand “coming back” to banks from both corporate as well as state-owned NBFCs. “We have a lot of pipeline cases in NBFCs and we are considering those,” Chand said.

Bank of Baroda, too, is bullish on renewables. “The conventional power sector already has surplus capacity, so there’s no need to go in for fresh capacity,” Sabnavis said. “But when you’re talking of renewables, even companies in the conventional space are getting into it. So there’s a lot of fresh investment.”

Traditional power companies such as Reliance Power and Tata Power have been indicating increasing focus on renewable energy projects over the past year.

Most banks have guided for growth in infrastructure-related sectors, being driven by increased investments that is also supporting demand for bank credit. The expectation is that if the proposed GST restructuring is approved, it will push consumption demand — also leading to a revival in non-infrastructure-based industries.

Core sector output grew at a muted 2% on-year in July 2025—the lowest since January 2025—compared to an upwardly revised 2.2% in the previous month.

“The contraction in output of coal (12.3% YoY, the most since June 2020), crude oil (1.3% YoY), natural gas (3.2% YoY) and refinery products (1.0% YoY) kept the infrastructure output growth at tepid levels,” Paras Jasrai, Associate Director at India Ratings and Research said in a note on the 20 Aug.

It added that output growth of only two sectors—steel and cement—touched a 21-month high of 12.8% and four-month high of 11.7%, respectively, in July 2025, reflecting the impact of steady government spending.

Credit revival in H2

Setty is optimistic that for the full financial year FY26, SBI’s credit to corporates will return to double-digit growth led by a pick-up in the second half of the financial year.

“Second, when MCLR gets readjusted and we become more competitive as compared to the market, probably that also is one of the reasons corporate growth rate comes back,” Setty said, adding that as corporates have greater visibility on the domestic consumption side, they will “come back to the investment cycle” given that investment decisions are currently being delayed in some of the core sectors.

Banks typically price floating rate retail and MSME loans on the basis of an external benchmark—usually the policy repo rate—whereas corporate loans are linked to marginal cost of funds-based lending regime or MCLR.

PNB’s Chandra, too, was optimistic that within project finance, the bank is looking at loans with a tenure of 2-3 years and it doesn’t see any challenge “as far as the growth in the corporate loan book is concerned”.

Bank of Baroda’s Chand said the June quarter is generally a “slack season” for corporate loan growth, in part due to seasonal factors.

“Overall, I don’t think on the full year basis, there will be any less growth in corporate as compared to the growth we had in last year,” he said, adding that he expects growth to be much higher going forward with corporate loan growth for the whole of FY26 seen at 9-10%.

The bank’s executive director Lalit Tyagi added that there are many capex announcements from various corporates, including PSU companies, which will come up for funding in the coming years.

“There will be demand from the corporate side also and as we enter into the busy (festival) season, there will be a requirement on the working capital side also and there will be availments,” he said.