Agricultural Bank of China is clamping down on loans to polluting industries after a burst of lending to those sectors in the first half of the year, a source at the bank said on Tuesday.

AgBank, the last big state lender still to be bailed out by the government, made 252.9 billion yuan ($33 billion) in new loans in the first six months, more than 80 percent of its full-year target of 300 billion yuan, the bank official told Reuters.

Around 12.5 percent of those loans went to firms categorised as energy-intensive or polluting, taking AgBank's total exposure to that sector to 342.6 billion yuan at the end of June, he said.

AgBank Vice President Han Zhongqi warned at an internal meeting last week that Beijing's increasingly tough line towards companies that guzzle energy and spew out pollution was raising risks for the lender, China's third-largest by assets.

"Some of these borrowers have already brought tangible losses to our bank," the bank official cited Han as saying.

To contain the risk, AgBank decided to centralise the approval process for loans to industries under close government scrutiny such as copper smelting, electrolytic aluminium, iron alloy and calcium carbide, the source said.

Han said AgBank would even call in some loans to dirty industries.

The Economic Observer newspaper reported at the weekend that the state is preparing to inject $40 billion into AgBank, which is saddled with bad loans that are the legacy of government-directed lending down the years to farmers and rural enterprises.

BAD-LOAN RATIO DOWN

AgBank's non-performing loans at the end of June fell 8.4 billion yuan in the first half from the end-2006 level of 736 billion yuan, reducing its NPL ratio by 2.09 percentage points from 23.55 percent, the Financial News said on Tuesday.

Banking sources said regulators were leaning on China's big banks to rein in credit growth over the rest of the year to help prevent the world's fourth-largest economy from overheating.

But the AgBank source said demand at local level for loans was strong, prompting Han to warn that headquarters -- which is sticking to its 300 billion yuan full-year target for new loans -- would come down hard on branches that defied orders to slow lending.

Han also warned of the need to curb lending to some universities and expressway projects, two sectors that bankers say pose increasingly large risks for Chinese lenders.

The source said AgBank's first-half operating profit was 42.3 billion yuan, up 16.6 billion yuan from a year earlier.

But the three rises in interest rate so far this year are biting into profits: every 27 basis point increase cuts the bank's interest income by 1.5 billion yuan, the source said.

The appreciating yuan is another challenge. Every 1 percent rise in the currency reduces the value of the bank's $8 billion in foreign-exchange assets by 790 million yuan, he added.

The reported capital injection would pave the way for AgBank to enlist foreign investors as strategic partners prior to an eventual stock market listing -- the route taken by China Construction Bank Corp. , Bank of China and Industrial and Commercial Bank of China .

The source said AgBank's new president, Xiang Junbo, a former central bank vice governor, met the chief executive of France's Credit Agricole , Georges Pauget, in Beijing last month.

"They discussed the possibilities of strategic cooperation and exchanged their experiences in agricultural financing," the source said.