The scheme, which was launched by China in 2005, allows banks to package loans into tradable securities. The regulator sees it as a tool to shift risk away from the banking system as economic growth slows and bad loans risen.

China's big four state-owned asset management companies, and Standard Chartered Bank, will be included in the expanded pilot programme, the sources said. Standard Chartered and the Chinese companies declined to comment.

"As China's economy is facing bigger downward pressure, the asset quality of some smaller banks is under significant pressure. ABS is a favourable tool that can ease such pressure," one of the sources said.

The expansion also includes state-owned Postal Savings Bank of China (PSBC)，Export-Import Bank of China and dozens of regional banks such as Bank of Qingdao and Bank of Guiyang, local media outlet 21st Century Business Herald reported on Friday.

The cabinet-level financial stability committee said on Thursday that it would further deepen the reform of small and medium banks, and strengthen capital capabilities for commercial banks, especially small-to-medium-sized lenders.

The rare seizure by the government of then little-known Baoshang Bank earlier this year, and state rescues of Jinzhou Bank and Hengfeng Bank, have sharpened concerns about the health of hundreds of small lenders as China's economic growth slows to near 30-year lows.

(Reporting by Cheng Leng, Rong Ma and Tony Munroe; Editing by Alex Richardson)