China's banking regulator said Thursday that the nation's big banks urgently needed to change their attitude towards lending to small firms or they risk losing potentially lucrative business to foreign competitors.

Though the big State banks are increasingly seeking to diversify their business, they still tend to prefer to lend to big State-owned enterprises, which generally enjoy implicit guarantees from the government.

Small and medium-sized enterprises (SMEs) are often treated as having little creditworthiness and therefore find it very difficult to get loans from big banks.

That needs to change, said Wang Zhaoxing, assistant chairman of the China Banking Regulatory Commission, especially now that foreign banks have full access to the domestic market, including lending to high-quality small firms, which will probably become a key battleground in the future, he said.

"Big banks should not continue with their outdated mindset, old systems and practices in
offering this complicated and challenging financial service. They must update their
mechanisms," Wang was quoted as saying in a statement published on the agency's Website.

By the end of 2006, China's big five banks - the big four State banks plus Bank of
Communications Co - had offered an outstanding 1.79 trillion yuan (US$233 billion) in
loans to 684,300 small firms, 9.87 percent more than a year ago.

Of those loans, about 26 percent, or 472 billion yuan, turned sour, down 11.9 billion yuan or 3.33 percentage points from 2005.

Wang said his office would make more flexible regulations governing the classification of loans, capital adequacy ratios and bad loan provisions, to help banks lend more to small enterprises while adequately controlling risks.

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