China's banking regulator is studying whether a cap on loans at 75 percent of deposits should stay as the rule may be deterring foreign banks, which complain it raises capital cost, from being locally incorporated, sources told Shanghai Daily yesterday.

The China Banking Regulatory Commission recently studied the implications of the loan-to-deposit ratio on the foreign lenders which seem less eager to be locally incorporated, especially if by doing so it will stymie their wholesale banking business in the domestic market, a foreign bank source in Beijing told Shanghai Daily yesterday.

"No localization, no restrain from the loan-to-deposit ratio," the source said. "That's why many foreign banks that only do wholesale banking business in China choose not to be locally incorporated."

The loan-to-deposit ratio regulates the maximum amount of loans a lender can extend in relation to the deposits it has. The CBRC monitors lenders' average daily ratios monthly.

Citing an unnamed source at the CBRC, the Economic Information Daily reported yesterday there are plans to ease the 75 percent ratio as a risk supervision indicator from the proposed liquidity-risk management rules.

"The ratio indirectly pushes up lending cost," another bank source in Shanghai said yesterday. "The People's Bank of China and the CBRC had a prolonged debate about it due to their different positions."

He added the central bank was concerned that a stringent ratio may hurt credit supply, harming economic growth and stability.

"But the CBRC was reluctant to relax its control over commercial banks as the monthly reported ratio is an important measure to monitor the liquidity risk from a lending binge," he explained.

Bankers, however, welcome a possible easing in control and blamed the harsh ratio for raising capital cost.