Chen Jun, in preparation for his wedding, applied for bank loans to buy an apartment in downtown Nanjing, capital of Jiangsu Province. As a first-time home buyer, he thought he was entitled to a 30 percent discount on the loan's interest rate. He was surprised when all the banks knocked him back.

The practice of giving first-time home buyers a 30 percent discount on interests rate is fast disappearing as banks tighten lending to guard against bad loans. Most first-time home buyers can only get a 15 percent discount now.

Experts reckon the debate on how to prevent wide-spread default on loans will be one of the hottest at China's top legislative session to be held next week.

Concerns about bad loans have arisen after Chinese banks lent massive amounts that ended up in the property market, said Guo Tianyong, director of the China Banking Industry Research center with the Central University of Finance and Economics.

Lending to local governments' financing units is a concern, too, Guo added.

Some 2 trillion yuan, or 20.9 percent of China's new lending in 2009, found its way into the real estate sector, according to the People's Bank of China (PBoC), China's central bank.

A Bank of Communications report said local governments received financing from several banks through numerous financing units, making debt management chaotic as banks had difficulty tracking overall debt.

Chinese local governments cannot issue bonds, except through a limited pilot program launched in 2009. But they have set up more than 3,000 commercial units, and they borrow heavily through them.

About 3,800 financing units set up by local governments oversee assets of 8 trillion yuan. The local governments' liabilities total 5 trillion yuan and have a 60 percent liability rate, according to the PBoC.

Bad loan alarm bells having been ringing ever since China introduced its moderately loose monetary policy to fight the effects of the global financial crisis.

Chinese banks lent a record 9.59 trillion yuan in 2009 to help the economic recovery, which was almost double the amount loaned in the previous year.

The 2010 government loan target is 7.5 trillion yuan. But in January alone, banks extended 1.39 trillion yuan in new loans -- 18.53 percent of the full-year target.

"The record lending helped Chinese economy recover. But it also brought risks. Credit to unfavored sectors may tighten and lead to unfinished projects or bad loans in the end," said Lu Zhengwei, chief economist at Fujian-based Industrial Bank.

"When China unleashed that huge amount of credit, much of it found its way into the stock and property markets, inflating assets bubbles, inflation risks and bad loans," said sources who declined to be named at a state-owned commercial lender.

Experts believe bad loans can be checked through the control of lending growth and monitoring of capital sufficiency, the provision coverage ratio and the deposit-loan ratio.

Ba Shusong, a researcher with the Development Research Center under the State Council, said governmental and institutional controls might help reduce local governments' fund raising.

China's banking regulator, China Banking Regulatory Commission (CBRC), issued two directives on working capital loans and personal capital loans on Feb. 21, asking banks to manage risks more carefully and to verify that loans are used for their intended purposes.

The CBRC rules forbid the use of working capital loans to make fixed-asset investments or to buy equity stakes.

They also outlaw unreasonable loan quotas and scrambling to extend loans.

China has raised banks deposit reserve ratios twice in 2010.

Several months ago the CBRC required large banks to raise their minimum capital sufficiency rate from eight percent to 11 percent. Small and medium-sized banks had theirs raised to 10 percent.

At the same time, banks' provision coverage ratio was raised to 150 percent from 130 percent.

The lending structure should be adjusted to divert more credit to advanced manufacturing sectors, the modern service sectors, and small- and medium-sized enterprises, said Yan Qingmin, director of Shanghai Banking Regulatory Bureau.

He added credit should be drained from high-risk sectors, especially those that are highly energy intensive or polluting. Moreover, sectors suffering production overcapacity should also see tightened credit.

China's banking sector suffered in the 1990s for having lent heavily to local governments and state-owned enterprises. The lending spree resulted in 2 to 3 trillion yuan in bad loans.

The government issued 270 billion yuan of special bonds to deal with it. Four asset management companies were set up to takeover the 1.4 trillion yuan of bad loans incurred by the major lenders.

"The supervisors obviously are not willing to see the progress of China's banking sector in the past decade be obliterated by bad loans," said Guo, adding that he hoped the government's work report this year will mention specific measures to deal with the issue.