In a bid to encourage banks to issue more loans to small businesses, China will adopt a higher tolerance on bad loans and loose credit control, according to a new rule from the banking regulator yesterday.

China allows less risk weighting of small enterprise loans by considering credit of less than 5 million yuan (US$769,231) as retail loans so that banks may be less pressured on meeting capital adequacy ratio requirement, the China Banking Regulatory Commission said, quoting a new rule yesterday.

The CBRC also exempts loan-to-deposit requirement for small enterprise loans of less than 5 million yuan each, funded by financial bonds. That means banks can enjoy more freedom in extending loans to small businesses with less worries to control credit growth while they need to keep the loan-to-deposit ratio under 75 percent.

Banks can also open more new branches if the growth in small enterprise loans is higher than overall loan expansion for two straight years, according to the notice.

"We believe the notice is generally positive for the bank sector," said Barclays Capital yesterday. "Such concrete regulatory support could encourage more small enterprise lending, thus relieving their cash-flow difficulty and financing problems, which would be positive for asset quality."

Loans to small businesses accounted for 29 percent of China's total loans at the end of April, a rise of 7.1 percentage points from the beginning of the year.

Banks saw bad loans from small businesses dropping 14.7 billion yuan in the first four months to 239.5 billion yuan. The non-performing small-business loan ratio dipped 0.37 percentage point to 2.61 percent at the end of April.

However, there are still concerns on loans to small businesses.

"We believe setting up government guarantees and support agencies for small and medium enterprise lending and boosting SME loan pricing through subsidies may be alternative policy tools, " Barclays Capital said.