The Reserve Bank of India [Get Quote] is reviewing banks' exposure to the commercial real estate sector.

This comes on the back of a continuous rise in prices in the sector, even as the regulator has followed prudential norms for taming the flow of bank credit by raising the risk weights for capital allocation.

The RBI is contemplating a sectoral cap for limiting the flow of bank credit to the sector, in line with the limits imposed for capital markets. Another option being considered is to further raise the risk weights on such loans.

According to banking sources, further prudential tightening for the commercial real estate sector would not have been required had the regulator gone ahead with the implementation of the revised capital adequacy norms, popularly known as Basel II norms.

This is because under these norms, risk weights are proportionate to the sensitivity of the sector. The higher the risk weight, the higher is the capital allocation.

Sources close to the development said the commercial real estate sector was under strict observation, though any concrete step by the RBI to check the flow of credit might take some time.

On the other hand, banks have become cautious in lending to the sector and are cutting down their exposure made in the form of venture capital.

They are not only reviewing proposals for commercial real estate funding, but have also become wary of investing in bonds floated by real estate companies.

A study by the RBI has revealed that banks, which have lent heavily to the commercial real estate sector are not necessarily exposed highly to retail home loans.

In fact, the study did not find any correlation between the two categories of lending, said a banking source.

Bankers felt raising the risk weight might send a signal that the RBI was much concerned about banks' exposure to the commercial real estate sector, which was anyway not overly dependent on bank finance.