The Chinese banking and insurance regulator - China Banking and Insurance Regulatory Commission (CBIRC) - has tightened the operating rules for smaller banks in villages and towns as part of efforts to reduce financial risks caused by mismanagement in a weak area of the banking sector.

"A few banks in villages and townships have deviated from their original mission of serving rural and smaller firms," China Banking and Insurance Regulatory Commission (CBIRC) stated in a notice on Thursday.

"They need to focus back on the credit business in rural areas and enhance financial support for rural rejuvenation."

Banks in villages and townships will be banned from cross-regional credit granting and bill financing, and the majority of new loans must be lent to local farmers, communities and smaller firms, the CBIRC added.

The regulator may suspend business at high-risk institutions and those that have deviated far from their original purpose, and limit their market access or reshuffle their management teams, according to the notice.