Domestic banks in China's major cities are tightening supervision on loans, particularly mortgages, to prevent money from being diverted to the bullish but possibly overvalued stock market.

The country's benchmark Shanghai Composite Index has skyrocketed 130 percent since early last year, enticing some market players and firms to misuse loans for equities trading, and potentially adding to the increasing number of non-performing loans.

In Hangzhou, capital of east China's Zhejiang Province, a bank official estimated up to 70 percent of its customers used part of their mortgages for equity or fund purchases.

The crackdown came after the country's banking regulator recently exposed the practice, threatening stricter checks later this month.

The outstanding performance of China's stock market has seen massive withdrawals from banks recently Shanghai's benchmark indicator closed at 2,716 points yesterday.

But many banks are facing an increasing rate of non-performing loans due to inappropriate use of funds.

The Shanghai branch of the Industrial and Commercial Bank of China (ICBC), the nation's largest lender, said yesterday it had realized the potential risk and put forward policies requiring local outlets to strengthen monitoring.

"Before obtaining the loans, borrowers are required to prove how they will use the money and have their records checked for any violation," an ICBC official said yesterday.

If any improper use of loans is found, the lender would terminate the loan immediately and the borrower would have to return the funds, he added. Other banks in Shanghai said they were cautious about the issue.

To help companies and banks reduce risk, a high court in Shanghai threatened to draw up a blacklist of those with bad credit ratings who had ignored court orders for more than six months. Those blacklisted would be barred from buying new homes or obtaining loans.

In Beijing, keeping close track of diverted loans is now policy at Bank of Communications.

Financial intermediaries in Shenzhen, in south China's Guangdong Province, carry out checks to combat misuse, particularly for personal loans.

Han Jianbo, deputy director of the wealth management center at China Merchants Bank's Hangzhou branch, said: "We will keep a close watch on how loans are used."

(China Daily February 8, 2007)