Mainland banks soon will have to slow down or even stop extending new loans as regulators attempt to rein in rapid credit growth, which has stoked fears of rising bad debt, say banking officials briefed on the new policy. The new rule being drafted will tighten capital requirements after banks extended a record amount of loans in the first half of the year. The country's major state-owned lenders were recently informed by the China Banking Regulatory Commission on the rule change, under which banks' mutual holdings of one another's subordinated bonds will be discounted in the capital adequacy ratio calculation. The policy is likely to take effect next month, said an official with a city commercial bank who is in charge of the lender's interbank trading activities. Officers from CBRC's communication department could not be reached for comment yesterday. Mainland banks used to sell subordinated bonds, or hybrid debts, to each other because the proceeds could be added into their net capital bases. Lenders are required to meet an 8 per cent capital adequacy ratio. 'The timing of the rule change shows the regulator's increasing awareness of risks,' said Gu Weiyong, the chief investment officer at Ucon Investment Management. 'It is a savvy move since it is a must to cool the lending spree now.' Mainland banks extended loans of 7.73 trillion yuan (HK$8.77 trillion) in the first seven months of this year, nearly triple the amount a year ago, as they were encouraged to provide state companies easy credit amid the government's four trillion yuan stimulus. The monetary loosening since the end of last year triggered worries of soaring non-performing loans in the future. The tightened capital requirement will force lenders to control the size of lending and reduce total assets to meet the mandatory capital adequacy ratio. At the end of 2003, the CBRC allowed banks to sell subordinated bonds to boost capital, a move to help lenders speed up expansion. 'The rule change doesn't necessarily mean that mainland banks are at odds now, but it sends a clear message to banks that they need to rein in loan growth,' said TX Investment Consulting analyst Wang Yifeng. 'It is actually a double-edged sword since the new rule will curtail banks' business development.' Last month, the CBRC announced that all banks must raise their bad-loan reserve ratio to 150 per cent at the end of the year, forcing lenders to set aside an additional 70 billion yuan as provisions as asset quality deteriorated. The country had no mandatory bad-debt reserve ratio before, but the regulator has been pushing state lenders to boost reserves, fearing that a portion of the new loans will turn sour. Early this month, mainland media reported that the CBRC would raise the capital adequacy ratio to 12 per cent from the current 8 per cent, but the regulator denied the news, admitting, however, it was encouraging banks to boost core capital.