The People's Bank of China and the China Banking and Insurance Regulatory Commission told domestic banks to cap their lending to the real estate sector under a new mechanism that will come into effect Jan. 1 to head off systemic risks, according to media reports.

The ratio of outstanding property loans to total loans will be capped at 40% and outstanding mortgages as a proportion of total loans will be capped at 32.5% for Bank of China Ltd., Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd., China Development Bank, Bank of Communications Co. Ltd. and Postal Savings Bank of China Co. Ltd., Caixin reported Jan. 1.

These banks will have a grace period of four years to bring their exposure down to meet regulatory requirements.

Banks will be divided into five categories, subject to different caps on their loans to the real estate sector, Bloomberg News reported Dec. 31, 2020. The authorities said lenders who fail to comply with the new limits will face additional capital charges.