China's burgeoning online financial sector is hitting some obstacles, with banks being advised by an industry body to hold Internet-based funds to the terms of deposits.

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In a recent internal meeting, the China Banking Association specified the interest rates on the funds' bank deposits, and it told member banks to "strictly observe" the specifications, the Economic Daily reported.

Banks are being urged to cap deposit rates at 1.1 times the central bank's benchmark rate and charge penalties on premature withdrawals of fixed deposits, the report said.

Both steps are said to target Internet money market funds that offer wealth management products.

The funds put most of their huge assets into negotiated deposits with banks, where they can earn high interest rates and usually receive full interest income even if they withdraw the money early.

Experts at the CBA meeting suggested these deposits should be treated as general deposits rather than interbank deposits, meaning the Internet funds would lose their advantages, such as penalty-free early withdrawals.

Further, deposits would be subject to a 20 percent required capital reserve, according to the report.

Economic Daily is one of the major channels through which the central government sends policy signals.

CBA, the self-disciplinary organization of China's financial sector, has 362 members comprising policy banks, commercial banks and other financial institutions.

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