China's central bank is considering changing a key component of its monetary policy management by altering the way it manages bank credit, three sources close to the matter told Reuters on Tuesday.

Under the proposed changes, the People's Bank of China (PBOC) may judge how much a bank can lend by looking at its capital adequacy ratio, liquidity conditions and provisions for bad loans.

That means the PBOC may set different deposit reserve ratios for banks and adopt more frequent use of window guidance, which is a direct order to bankers to rein in bank credit, the sources said.

They said the PBOC could also step up its issuance of punitive central bank bills to banks that have breached their lending orders.

If effected, these changes would be a shift away from the present one-size-fits-all policy where Chinese banks, whether big or small, are required to have a debt-to-deposit ratio of 75 percent.

The central bank has held internal discussions, and has talked about it with bankers. But the plan is not finalized as there are still disagreements, one source close to the matter said.

After China unleashed an extraordinary surge in bank lending in 2009 to foster its economic growth following the global financial crisis, the PBOC has been trying to rein in lending and money growth this year to stop the economy over-heating.

China has officially switched its monetary policy to prudent from its earlier moderately loose stance, in part due to rising price pressures.

Beijing has yet to announce its annual loan target for next year, although state media said earlier this month that China would set a target for about 7.5 trillion yuan in new loans in 2011, level with this year's target.

Analysts said the changes, if effected, would give the world's second-biggest economy and its banking sector more flexibility. Banks may, for instance, get guidance on how much to lend on a monthly or quarterly basis, instead of the present annual target.

Instead of simply setting an annual loan target, which is a top-down approach, the new system will help better manage credit risks in banks, said Lian Ping, the chief economist at the Bank of Communications.

Chinese banks of various sizes have shown varying paces of lending growth, with smaller ones usually experiencing fastest credit growth despite having less deposits on hand.

Analysts said the present overall annual loan target system does not take enough account of the variations in banks' liquidity and risk profiles, thus raising the risk of future bad loans.

The previous one-size-fits-all measure is no longer fit for the economic development, and a rigid loan target set at the beginning of a year cannot reflect the changes in the economy through the year, Lian said.

Ye Yunyan, a banking analyst with Galaxy Securities in Beijing, said the use of differentiated deposit reserve ratios and selective issuance of punitive bank bills would also give Beijing more choices and tools in managing bank loans.

Chinese banks had issued a total of 7.44 trillion yuan in net new loans by the end of November, putting themselves firmly on course to overshoot this year's credit target.

(Reporting by Beijing Newsroom; Editing by Ruth Pitchford)