The Funding Conundrum: Private Capex Thrives on Equity, Banks Scale Back in FY25

Image Source: Times of India

In FY25, bank and financial institution (FI) funding to private capital expenditure (capex) declined to below Rs 5 lakh crore from Rs 5.5 lakh crore in FY24, despite an increase in the number of sanctioned projects. This reduction comes even as private sector investment activities show signs of cautious optimism, reflecting a complex capital investment environment as corporates balance strong financial health with geopolitical and market uncertainties. The banking sector’s shrinking share of industry loans towards private capex signals that a robust revival in private investment is yet to materialize fully.

Key Developments and Highlights

Number of sanctioned projects increased to 1,584 in FY25 (907 by banks and FIs) from 1,500 in FY24 (944 by banks and FIs), indicating higher project approvals.

Despite more project sanctions, the total capital outlay funded by banks and FIs remained largely flat year-on-year after considering project phasing.

Industry loans now form just 22% of overall credit, down significantly from over 45% at peak levels, showing lending caution by financial institutions.

Bank and FI sanctions as a share of industry loans fell to 9.3% in FY25 from 10.7% in FY24.

Corporates leaned more on equity markets, nearly doubling equity issuance in FY25, demonstrating preference for non-debt funding.

Financial Health and Corporate Strategy

Corporate balance sheets are in strong condition with the highest cash buffers since FY16 and improved operating margins.

The corporate debt-to-GDP ratio is at a historic low, encouraging reduced reliance on bank loans.

Heightened geopolitical uncertainties and cautious outlook on debt have restrained large-scale investment commitments.

Analysts speculate that unlike past cycles, credit demand for capex will increment growth rather than lead it given current corporate caution.

Sectoral Dynamics in Private Capex Funding

Infrastructure sector remained dominant, accounting for 51% of total projects, though its share declined from 60% in FY23 and 56% in FY24.

Within infrastructure, power projects surged to nearly 40% from 24% in FY24, while roads and bridges funding dropped steeply to 9% from 25%.

Chemical sector investments grew notably, rising to an 8% share from 3% the previous fiscal year.

Role of Mega Projects and Regional Variation

Mega projects above Rs 5,000 crore gained prominence with 10 such projects sanctioned, totaling Rs 90,000 crore, comprising 25.8% of total project costs versus just 8% in FY22.

However, this mega project funding remains significantly lower than the peak of over Rs 2.5 lakh crore.

Regionally, there was an increase in mega project sanctions in Gujarat, Maharashtra, and Andhra Pradesh, whereas Karnataka and Uttar Pradesh saw declines.

Greenfield projects dominated, making up over 90% of total costs financed, although their incremental contribution has moderated.

Broader Implications for the Economy and Future Outlook

Despite the softness in bank and FI funding, the private capex outlook remains cautiously optimistic.

Equity markets expanding as alternate funding sources suggest evolving corporate funding strategies.

The Reserve Bank of India forecasts a 21.5% rise in private sector capital investment to Rs 2.67 lakh crore in FY26, signaling anticipated recovery.

A combination of policy support, easing interest rates, and sustained infrastructure focus is expected to sustain investment momentum.

The ability of firms to translate investment intentions into project execution will be critical for sustaining India's growth trajectory.

Source: Economic Times BFSI section