Shang Fulin, chairman of the China Banking Regulatory Commission, has warned that banks should prevent financial innovation that doesn't cater to real demands of manufacturers and service providers.

"Banks should be wary of self-circulation of capital and arbitrage behaviors against regulations to make sure credit funds flow into the real economy," he said in a statement published on the official website of CBRC on Monday.

Shang also urged urban commercial banks to strengthen their financial services for small businesses.

"The development of urban commercial banks has entered a critical period, which requires a breakthrough in their transformation. It is their duty to particularly serve the small businesses," he said.

According to CBRC statistics, by the end of March 2013, the total asset of urban commercial banks nationwide stood at 12.94 trillion yuan ($2.11trillion), with outstanding loans of 5.48 trillion yuan, among which 2.02 trillion yuan extended to small businesses.

Their non-performing loans reached 45.4 billion yuan as of March, accounting for 0.83 percent of the total loans.