China's banking regulator issued draft rules restricting entrusted loans in a bid to curb excessive margin finance, according to the official website of China Banking Regulatory Commission on Monday.

The draft rules issued on Jan 16 said banks shall not bear credit risks if the loan defaults, and lenders shall not issue entrusted loans if the fund is raised for specific uses by the authorities or raised from bank lending.

Banks shall not issue entrusted loans using funds raised through debts, raised from other companies or individuals, or other sources that cannot be identified, the draft rules said.

Entrusted loans is a form of inter-company loan where bank intermediates one company's lending to another company's borrowing and collect a fee in the process.

Entrusted loans have been used as a margin trading channel that may bring risks to banks as in the past when there was default in lending, it was usually the banks that bore the risks, said market insiders.

Regulator's curb on entrusted loan is aimed at cracking down on margin trading which has grown at a fast pace amid bullish stock market, as some brokerages borrowed short-term lending and lent out as long-term loans, which brings about liquidity risks, said Chen Wei, loan manager of a Shanghai-based bank.

The draft rules are open to public comment until Feb 16 for suggestions on amendments.