- Access to credit is a key enabler of business growth and operational resilience as financing needs differ across firms depending on their financial health, risk profile and strategic objectives.
- Given the lofty targets that require to be achieved to realise the vision of a Viksit Bharat by 2047, multiple financing channels need to fire in tandem for meeting the needs of businesses.
- In India, corporates primarily access credit through five channels—bank credit, non-banking financial company (NBFC) financing, corporate bonds, external commercial borrowings (ECB) and private credit.
- Each of these sources differs in terms of target borrowers, borrowing costs, repayment structures, tenure, funding flexibility and covenant requirements.
*WALR on Agriculture, MSMEs, Vehicle and Housing Financing
have been considered
- Putting aside ECBs and private credit, using both bank loans and bonds can help companies reduce their dependence on any single lender, lending group or capital source. They can access the bond market when bank lending tightens and vice versa.
- Strongly rated issuers can often access debt at more competitive terms through corporate bonds than through traditional bank funding.
- Bonds also enable companies to access institutional investors such as mutual funds, insurance companies, pension funds and foreign investors rather than relying solely on banks.
- Bonds can offer longer maturities and, in some cases, a lighter covenant framework than bank loans, making them suitable for infrastructure projects, large capital expenditure programmes and other long-gestation investments that require substantial long-tenor financing.
- The bond market, however, works very differently compared with banks.
- Treatment of defaults is a case in point.
The default divide
- A bank loan default typically occurs when a corporate borrower fails to meet repayment obligations to a bank or lending institution.
- A bond default occurs when an issuer misses a scheduled interest or principal payment on its debt securities.
- Yet, while both defaults reflect financial stress, these are triggered, identified and handled differently
- This makes it imperative for businesses to not lose sight of the differences as they diversify their funding mix beyond banks.
- Under Reserve Bank of India (RBI) norms, loan accounts are typically classified as non-performing assets (NPAs) only after payments have been overdue for more than 90 days. Stress is often recognised through a phased process.
- A bond default, however, is recognised immediately when an issuer misses payment, even by a single day. Payment failures can lead to a rating downgrade from AAA to D (default).
- To be sure, a delayed payment may be a short-term liquidity issue rather than a sign of deeper financial distress, particularly when contractual grace periods apply. However, if the borrower breaches key loan or bond terms, the situation can escalate into an event of default, which gives creditors the right to take remedial action.
- For bondholders, the consequences often include rating downgrades, price volatility and uncertainty around recovery prospects. For banks, consequences can include accelerating repayments, enforcing security, and initiating recovery actions. While both bondholders and banks face exposure to the borrower’s weakening credit profile, the tools available to manage the default can differ significantly.
- Once a default occurs, the focus shifts to recovery. Banks may pursue restructuring, enforce security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act and seek recovery through debt recovery tribunals or the Insolvency and Bankruptcy Code (IBC).
- Bondholders rely on debenture trustees, collateral enforcement mechanisms and their position in the IBC waterfall for recoveries. Ultimately, recovery outcomes depend on factors such as the quality of collateral, creditor seniority and the success of the resolution process, with creditors often having to absorb some degree of haircut.
- Bond defaults differ from bank mainly in the structure of the credit relationship and not necessarily in underlying insolvency economics. Bondholders are typically exposed through fixed-income securities issued through multiple investors. Unlike a bank, an individual bondholder may have limited ability to monitor the borrower, renegotiate terms or influence the insolvency process.
Recovery in the bond market depends on:
- Whether the bond is secured or unsecured
- The ranking of bond in the capital structure
- The quality and enforceability of the collateral
- Whether the bond is senior, subordinated
- The presence of guarantees, covenants, trustees and reserve accounts
- Bond rating reflects expected credit risk, but it is not a guarantee of repayment
- Bank defaults and bond defaults may begin differently, but once a borrower enters insolvency, both forms of credit risk are tested by the same fundamental questions: what assets remain, how quickly value can be preserved, which creditors have priority and whether the borrower can be revived.
- Banks may suffer large losses from a few major borrowers because their loan books are concentrated while bond investors may diversify more easily but still faces concentration in terms of sectors, business groups or issuer.
Admitted claims and their realisation value
(Rs crore)
Source: The Insolvency and Bankruptcy Board of India’s
quarterly newsletter for January–March 2026, cumulative outcomes under
resolution plans
- The recovery rate against admitted claims has fallen from 39.26% in fiscal 2021 to 30.6% in fiscal 2026. In practical terms, creditors recover only \~Rs 31 to every Rs 100 of admitted claims and at the same time, realisation remains substantially higher than the liquidation value (around 167%) in fiscal 2026, suggesting that preserving a distressed company as a going concern through a resolution plan can create more value than selling assets piecemeal.
Reforms and policy measures
- India’s approach to credit distress has evolved over the past decade. Reforms, such as the IBC, have boosted private credit in India by strengthening the creditor rights and streamlining data resolution. IBCs provide the highest level of recoverability compared with other methods.
- It addresses the growing need for a comprehensive law that would be effective in resolving the insolvency of debtors, maximising the value of assets available for creditors and easing the closure of unviable businesses. It also established the Committee of Creditors, providing banks, bondholders and other financial creditors with a common platform to drive resolution decisions.
- Such reforms and policies have led to the rise of special situation and distressed asset funds, which provide capital to struggling businesses when traditional banks hesitate.
- Additionally, the improved resolution framework has increased foreign investor confidence, encouraging global credit funds to invest in India’s debt markets.
- The Securities and Exchange Board of India (SEBI) had set up the Corporate Debt Market Development Fund as a backstop for investment-grade corporate debt securities during market stress, helping ensure market stability and enabling mutual funds to meet redemption pressures without resorting to distress sales of corporate bonds.
- Credit default swaps were introduced to develop a liquid market for corporate bonds, especially for bonds of lower-rated issuers.
- At the end of 2022, the RBI introduced a framework for online bond platform providers, offering an avenue for retail investors to access the corporate bond market at nearly zero transaction cost. Additionally, the ticket size for corporate bonds was lowered to face value of Rs 10,000 from Rs 10 lakh to encourage retail participation.
- In 2023, SEBI mandated large corporates to raise a minimum 25% of incremental borrowing through the issuance of debt securities. With the help of this, more entities can be mandated to borrow from the capital market, further deepening the corporate bond market.
- In 2025, the National Bank for Financing Infrastructure and Development established a partial credit enhancement facility for corporate bonds in the infrastructure sector, rated below ‘AA’ to tap bond financing, thereby reducing their dependence on bank funding.
- In 2026, the RBI introduced total return swaps on corporate bonds to further deepen the corporate bond market by enabling investors to gain credit exposure without holding the bonds and supporting market-making and risk transfer, improving liquidity, price discovery and overall market depth.
History of bond defaults and stressed assets
Source: CRISIL Intelligence (data includes bonds held by
mutual funds)
- The default cycle in India’s corporate bond market appears to have largely normalised after the stress seen during the pandemic. The number of defaulting issuers peaked at 11 in fiscal 2022, then fell sharply to two in fiscal 2024. Defaults ticked up to six issuers in fiscal 2025 and eased to five in fiscal 2026 but remain far below the peak stress levels.
- This moderation reflects improving credit quality, stronger corporate balance sheets and the impact of structural reforms such as the IBC, tighter disclosure requirements and enhanced market discipline. While default risk has not disappeared and remains concentrated among issuers facing liquidity, refinancing or business-specific challenges, the overall trend points to a more resilient corporate bond market, supported by better credit underwriting and growing investor confidence.
Gross NPA of banks over the years (%)
Note: For March 2027, the estimated gross non-performing
(NPA) percentage is represented by an average of 2% in the chart Source: RBI
- Asset quality of SCBs improved further in March 2026, with the gross non-performing assets (GNPA) ratio declining to a multidecade low of 1.8%. The improvement was broad-based across major bank loan categories—agriculture at 5.1%, industry at 1.6%, services at 1.5% and retail loans at 1.0%.
- Industry recorded a larger reduction in its gross NPA ratio compared with the services, agriculture and retail loans since March 2021. Agriculture, despite improvement, continued to exhibit the highest GNPA ratio of 5.1%. The sustained decline in gross NPAs has also reduced provisioning requirements, which in turn supported stronger profitability. This had a positive effect on business growth. More broadly, it points to improving asset quality and underwriting standards, underpinned by healthier balance sheets and sustained profitability.
- For banks, a borrower default normally appears first as deterioration in asset quality. The bank may then classify the account as an NPA, increase provisions, restructure the loan, enforce security or refer the borrower to the IBC.
Default management is crucial in banks because:
- The original loan amount is often higher than the amount recovered
- Delays reduce enterprise value
- Resolution plan may result in a better recovery outcome than liquidation of the borrower’s assets
- Recovery under liquidation value does not mean bank has recovered its entire loan
- Banks may still face significant provisioning requirements and capital loss despite participating in a successful resolution
Final words
- Bank defaults and bond defaults are not competing signals of financial fragility, they offer complementary views of credit risk.
- A mature financial system benefits when both channels function effectively—banks provide scalable, relationship-based lending, while bonds contribute market-based financing with better price transparency, discipline, and diversified risk sharing, supporting the country’s growth financing needs in coming years.
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