On the scorecard, the largest increases were achieved by mid-sized commercial banks.

China Merchants Bank, the country's sixth-largest and seen as one of its best-run lenders, posted a whopping 156.6 per cent profit growth.

The giants of the industry, Industrial and Commercial Bank of China, Bank of China and Bank of Communications, recorded profit growth ranging from 76.05 per cent to 107.7 per cent.

The stellar performance was mainly driven by widening interest margins from higher lending rates and a change in tax regulations for banks that made most salary expenses deductible.

Despite government pressure to limit loan growth and the regulators' requirements for banks to set more money aside as reserves, lending is outstripping deposits as rapid economic expansion continues on the mainland.

For example, loans at Bank of China rose 8.2 per cent in the first quarter, outpacing the 5 per cent growth in deposits for the entire banking industry.

But the over-reliance on interest income represents a risk that is likely to widen this year amid tighter controls on lending by regulators. Beijing is battling accelerating inflation that has been fuelled by growing international commodity prices.

A credit officer at the Bank of Communications in Guangzhou surnamed Lin expects the tightening credit policy to lead to an increase in bad loans at the lender.

'The period from April to December last year was a robust one for banks, as many companies took on one-year loans,' he said. 'These short-term loans will present the biggest default risks.

'Small to medium-sized companies are facing liquidity pressures and are finding it difficult to borrow funds to refinance existing loans.'

The bank's Guangzhou branch estimates that non-performing loan ratios will increase 1 to 2 percentage points as small and medium-sized enterprises take longer to repay. Mainland companies are facing increasing credit costs stemming from the tighter monetary policy pledged by the central bank.

In a bid to ease rising prices, Beijing has ordered banks to keep the amount of new loans at last year's level.

The authorities have also asked banks to adhere to quarterly quotas as follows: 35 per cent of the annual lending quota in the first quarter, 30 per cent in the second, 25 per cent in the third and 10 per cent in the fourth.

Lending rates this year had risen 10 per cent for large companies and a sharper 40 per cent for smaller firms, Mr Lin said.

To make matters worse, many banks had recently begun charging an additional 1 per cent to 3 per cent service fee for other credit lines such as bank drafts. The loan 'quota was depleted fast even though we charged our customers additional fees', he said.

Despite declining loan volumes, interest margins - the difference between interest earned from loans and interest paid out to depositors - have improved significantly.

During the first quarter, Bank of Communications' net interest margin widened to 3.06 per cent, from 2.79 per cent at the end of last year.

Net interest margins increased from 3.07 per cent to 3.12 per cent at China Construction Bank and from 3.3 per cent to 3.54 per cent at Merchants Bank.

'Increases in lending rates helped boost interest income at banks, but it has put extra cost burdens on corporate customers,' said Qiang Liang, an analyst at Standard and Poor's.

'Export-driven companies will [face the highest risk of not being able to repay loans] on time due to slowing exports and increasing funding costs. We may start to see loan defaults in the coming months.'

Tighter liquidity has already raised concern among regulators. The China Banking Regulatory Commission has noted that credit quality at banks may deteriorate much faster than expected.

'Under the tightened monetary environment, credit risks that accumulated in the fast-growing phase will be exposed at an accelerated pace in the banking sector,' the regulator said in its annual report last week.

With reliance on interest income looking increasingly shaky, some banks are diversifying. Non-interest income growth at many banks exceeded 100 per cent last year and this extended into the first quarter.

Merchants Bank reported a 102.94 per cent increase in the first three months, primarily driven by growth in fees and commissions from products and services, such as bank card fees, guarantee fees and stock settlement fees, as well as foreign exchange dealings.

At the large banks such as ICBC, the growth was fuelled by expansion into other areas of the financial services sector.

'It's surprising to see non-interest income continuing to grow strongly despite the weak A-share market sentiment,' Kevin Chan, a banking analyst at Nomura Securities, said in a note. 'ICBC stands to benefit from its strong deposit franchise [in Hong Kong], which allows it to cross-sell effectively a wide range of products.'

Chinese lenders are increasingly realising the long-term growth limitations in traditional areas of banking and that this can be substituted with new products or new business lines. 'Other than equity-related mutual funds, banks can sell other wealth-management services such as deposit and structured products when the stock market does not perform well,' said Bonnie Lai, a banking analyst at China Construction Bank International.