China's bank regulator said it would ease its controls on bad loans incurred by smaller Chinese firms to encourage more banks to lend to them.

China wants to channel more bank lending towards its small- and medium-sized enterprises (SMEs), which usually face difficulties obtaining loans from banks that prefer the safety of lending to large state companies.

"We will appropriately loosen the non-performing loan ratio control for smaller firms," the China Banking Regulatory Commission said in a statement posted on its website late on Thursday.

The commission did not elaborate on the extent to which it would loosen its control over sour loans.

But it said the non-performing loan ratio for smaller firms dropped to 3.3 percent at the end of December, down from 5.3 percent at the start of 2010.

It also said that provisions made by Chinese banks for bad loans hit 218 percent in December, up 63 percentage points from the start of last year.

The regulator said it wants to ensure that loans to smaller firms grow as fast as the pace of growth in total new loans this year.

It said it would give banks incentives to sell new financial products to smaller firms and improve their credit guarantee system for these companies.

The commission said it would help smaller firms get easier access to financial services by simplifying the application process.

New loans to SMEs rose 35 percent in 2010 from the previous year, outstripping 25 percent growth in total new loans for the year, the regulator said.

It said outstanding loans to smaller firms hit 7.27 trillion yuan, or 24 percent of total loans issued to companies, but it did not provide a comparative figure.