China's banking regulator has urged lenders not to pay out extraordinary dividends and to limit their local government debt exposure, two people with direct knowledge of the matter told Reuters on Monday, 21 March.
The China Banking Regulatory Commission said banks' retained profits should be used primarily to replenish core tier 1 capital.
Lenders should also require local governments to reflect their full-scale debt obligations in their fiscal budget, the regulator said in a document seen by sources separately.
"We will earnestly guard against and resolve risks this year," said one of the sources.
Banks would be allowed to deal with their non-performing loans through restructuring, transfers, recovery and write-offs, as well as securitisation, the sources said.
China's lenders are facing increasing bad loans and credit risks as a government campaign to reduce capacity weighs on the manufacturing sector and as broader economic growth slows.
Bad loans at China's commercial banks swelled to a decade-high 1.27 trillion yuan ($195.63 billion) in 2015 as growth in the world's second-biggest economy cooled to the slowest in 25 years.
Speaking at the China Development Forum on Sunday, central bank governor Zhou Xiaochuan said he was concerned about the high level of corporate debt relative to gross domestic product.
China had many policy tools at its disposal to fend off financial risk and would improve its communication with markets, Premier Li Keqiang said.