Around 40 percent of loans to China's local government financing vehicles will come due this year and next, making that period a crucial time for banks to tackle the risks arising from such debt, the banking regulator said recently, according to sources.

In a quarterly meeting, the China Banking Regulatory Commission (CBRC) also urged banks to speed up their efforts to set up a better risk management system for making decisions on loans to local government financing vehicles (LGFVs), two sources with direct knowledge of the situation told Reuters.

While banks should continue to clean up such debts in line with past directives, the regulator also signalled a potential loosening of its stance, according to the sources.

It said that banks would still be allowed to lend to LGFVs for some projects, including for affordable housing and completing large construction projects approved by central authorities, the sources said.

A spokesman with the CBRC said the government had been partly successful in defusing the risk associated with loans of government financing vehicles. The next step was that banks must make full provisions on a risk-weighted basis based on the cash flow situation of the financial vehicles, and focus on receiving adequate collateral, the spokesman added.