China's banking regulator has ordered banks in the country to increase the amount of its lending to small businesses that are facing headwinds due to the current slowdown in the world's second-largest economy.

The China Banking Regulatory Commission (CBRC) issued the directive to banks as it noticed that several small businesses have defaulted in their loan obligations or have been forced to shut down due to financial troubles.

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The CBRC said bank loans to small businesses in China this year must be raised to a level higher than what was allocated in the previous year. The banks were also directed to issue credit to more small lenders.

As of the end of last year, Chinese banks had 20.7 trillion yuan of loans outstanding to small and micro firms, accounting for 24 percent of total lending.

With the rise of small businesses incurring bad loans, the CBRC also appealed to Chinese lenders to be more compassionate and tolerant to the plight of the small enterprises.

The banking regulators urged banks not to immediately cut off credit to firms that are still competitive but are just facing temporary difficulties.

Small and medium enterprises (SMEs) have long been considered by the central government as one of the major drivers of China's economy.

But as the country's economy grew at its weakest pace in 2014 to just 7.4 percent, the government was concerned that the SMEs could be experiencing business difficulties.

The economic growth last year was the weakest in more than two decades and many companies, particularly the SMEs that are are not backed by the state, are struggling.

To support the SMEs, the China Insurance Regulatory Commission has allowed insurance companies in the country to invest in venture capital funds.

The venture capital fund, to which the insurers can invest, however, must meet regulatory requirements.

Insurers have already been allowed on invest in the country's SMEs through the stock market and asset-backed projects.

TagsChina SME, China Banks, China bank loans