Commercial real estate emerges as a credit hotspot despite higher risk weights: Report

Banks have sharply increased lending to commercial real estate in the first four months of FY27, even as the Reserve Bank of India’s higher risk weights were aimed at regulating credit flow to the segment. Bank of Baroda Research said the trend reflects growing construction activity but also warrants closer monitoring given the sector’s risk categorisation.

Banks drive incremental lending

Banks accounted for 111.3% of incremental commercial real estate credit between March and July 2026, while NBFC lending to the segment declined during the period. Banks added ₹42,142 crore of credit, whereas NBFC credit contracted by ₹4,284 crore.

The bank share exceeding 100% reflects the contraction in NBFC credit: the report calculates banks’ share as incremental bank credit divided by combined incremental bank and NBFC credit. Overall, this points to a significant shift towards banks as the principal source of fresh funding for commercial real estate in the current fiscal.

The trend is notable because commercial real estate carries a higher risk categorisation, and the RBI has raised risk weights on such loans to regulate credit flow. Despite these measures, banks have continued to expand their exposure to the segment.

MUST READ: Rising cyber fraud puts customers at risk; banks need to invest more: Bank of Baroda CEO

Construction activity supports demand

Bank of Baroda Research attributed the strong lending momentum partly to improving construction activity. Gross value added (GVA) in construction grew 7.7% in Q1 FY27 in constant terms, compared with 5.2% in Q1 FY26.

Other indicators also point to strengthening construction activity. Cement production in the April-July 2026 period grew 9.9%, faster than the 8.2% growth recorded during the corresponding period of the previous year.

The stronger activity in the construction sector provides a demand-side explanation for the increase in credit. However, the research note cautioned that the rapid build-up in commercial real estate lending needs to be watched because of the sector’s risk profile.

ALSO READ: Gold-loan NBFCs stare at tougher competition as banks enter the market

Banks expand exposure while NBFCs remain smaller

As of July 2026, outstanding commercial real estate credit stood at ₹6.7 lakh crore for banks, substantially higher than the ₹1 lakh crore outstanding with NBFCs. On a year-on-year basis, commercial real estate credit grew 21.5% for banks and 22.3% for NBFCs.

Despite NBFCs recording slightly faster annual growth, their incremental lending turned negative between March and July, sharply contrasting with the expansion by banks.

The shift forms part of a broader trend in which banks have dominated incremental credit across most sectors in FY27 so far. Banks accounted for 77.1% of total incremental credit between March and July, with particularly strong shares in industry, infrastructure, agriculture and trade.

For commercial real estate, however, the combination of rapid bank-led credit expansion and higher regulatory risk weights makes the segment one to watch closely as construction activity gathers momentum.

DO READ: India's banking liquidity surplus hits ₹10.5 trillion after record diaspora inflows