BEIJING — The credit balance of China's online lenders will see a notable decline in the first two quarters, weighed on by tightened regulation of internet microloans, Morgan Stanley said in a report.

"We believe...a decline of 25 percent to 35 percent in the first half of 2018 during the height of regulatory scrutiny," the report said.

Chinese banking regulators have rolled out rules to clean up cash loans, or web-based micro lending, to rein in risks in the booming but loosely regulated market, with approval of online micro lenders halted and lending activities rigorously supervised.

The micro-lending market has seen explosive growth in recent years, as lending platforms offer easy cash loans to needy consumers. The report estimated total loan balances from online lenders could reach 2 trillion yuan ($309 billion) after an 800-billion-yuan increase in 2017.

But the industry's relentless growth and lack of regulation has left both lenders and borrowers unprotected, with reports of defaults and malicious debt collection sprouting.

The report said exit of players due to non-compliance and stricter licensing will be spotted.

"In the long term, we think the number of qualified cash loan platforms could shrink to 300 to 400 firms over time, from more than 2,000 currently."

The market will also likely see tighter borrower selection, longer testing periods of new products, and stricter funding and leverage requirements for lenders.

"Even lenders that meet regulatory requirements will slow loan volume during the period," the report said. But the investment bank still expects some recovery in the second half.

China's policy makers emphasized the hardline stance on financial risk control at a tone-setting meeting last month. The regulation on online lending and other tech-enabled finance is expected to be a significant part of the new approach.

Huang Wei, assistant chairman of the China Securities Regulatory Commission, has said all fintech-powered deals should come under targeted supervision, adding there should also be room for healthy development in the sector.

The People's Bank of China has set up a fintech committee to enhance research, planning and supervision coordination in the field.

"As fintech sometimes evades supervision, it is important for regulators to guide the emerging sector to do its part for the real economy and risk control, which is also helpful to its long-term, stable development," said Richard Xu, an equity analyst with Morgan Stanley.