Banking has changed immeasurably since the mid-1990s. In the developed banking systems—or rather the overdeveloped banking systems—new instruments have appeared and entirely new markets have been found. In India, however, financial innovation has not played a large role. Rather, what has changed banking is the retail revolution.

At whose expense was this increase in the share of personal lending done? At the expense of lending to industry. If we leave out lending to the construction sector and consider the rest of industrial lending, we find that its share in the total bank credit pie fell dramatically, from 46.6% in 1996 to 32.71%. Note that the entire gain in the share of personal lending has occurred at the expense of industrial loans.

Also See The Retail Banking Revolution (Graphic)

Let’s slice the data another way—let’s look at the increase in outstanding credit in the 13 years between March 1996 and March 2009 and see which sectors have contributed to that growth. Lending to industry accounted for 39% of that growth, followed by personal loans, which accounted for 20.4%. Interestingly, mortgages accounted for 10.7% of the growth, but lending for “other personal loans", which includes credit cards, vehicle loans and purely personal credit such as overdrafts also accounted for 9.5%. Significantly, this was almost equivalent to the contribution of trade finance, which was 9.8%. Loans for construction (7.7%) and to finance companies (6.9%) were the other large contributors.

Even more interesting are the lending numbers split between rural, semi-urban, urban and metropolitan areas. In 1996, the share of loans to the manufacturing sector used to be 26.5% of total bank lending in the rural areas and 33.7% of lending in the semi-urban areas. By 2009, that share had dropped to 17% for the rural areas and 17.6% for the semi-urban regions.

In sharp contrast, the share of personal loans went up from 9.1% of total bank credit in rural India in 1996 to 16.3% in 2009. In the semi-urban areas, this proportion went up from 14.6% to 29.1%. Note that the share of personal loans was therefore more than the share of loans to the manufacturing sector in the semi-urban areas. The share of agricultural credit increased from 22.9% of total credit to the semi-urban areas in 1996 to 27.7% in 2009. In the rural areas, the share of agriculture in credit remained more or less the same at 38.6%.

There have also been several changes in the pattern of bank lending in urban India. Not surprisingly, loans to manufacturing account for the largest share of total credit in the metropolitan areas. But in urban India its share has gone down from 49.2% of total credit in 1996 to 28.4% and in the big cities its share has fallen from 51.9% in 1996 to 31.6%. In the urban centres, the share of personal loans, at 28%, was in March 2009 almost equal to the 28.4% share of loans to the manufacturing sector. Part of the share that has been lost in manufacturing has been taken up by lending to construction, which has gone up from 2% to 9.4% in the metropolitan areas. Lending to finance companies has also seen its share increase substantially in the metropolises.

Several questions are thrown up by this data. One, if the share of agriculture in rural incomes has come down, why is that not reflected in the pattern of rural credit? The same question applies to the semi-urban centres. Two, the proportion of trade credit has declined in both rural and semi-urban areas—how is it that personal lending is growing at a more rapid clip than growth in trade credit? Three, in both rural and semi-urban India, the proportion of housing loans to total credit is lower than the proportion of other personal loans.

For instance, for semi-urban regions, the share of housing loans went up from 4.2% to 12.9% between 1996 and 2009. But the share of other personal loans increased even more, from 9.7% to 15.6%. One reason could be a large increase in vehicle loans. Or perhaps more loans against pledge of gold ornaments, which could point to rural distress. Or do the banks push high interest personal loans? And finally, does the lower share of loans to the manufacturing sector reflect an underlying change in the economy? The trends suggest that but these questions can only be answered by further research and by fieldwork.

Graphic by Paras Jain/Mint

Manas Chakravarty looks at trends and issues in the financial markets. Comment at