BEIJING, April 28 -- Securitization of small and medium-sized enterprise (SME) and micro loans, a sector traditionally under-served by Chinese banks, is credit positive, a Moody's report said on Tuesday.

The shift will diversify funding channels to SMEs and micro enterprises and pave the way for Internet finance providers to grow into private commercial banks in China, it said.

The China Banking Regulatory Commission has indicated that it is prepared to license more private commercial banks, saying that it is a top priority for the year, which could pave the way for securitization by Internet banks and free up funding for the country's SMEs, said Moody's analyst Georgina Lee.

Small loan lenders in China play a key role in financing start-ups and SMEs, but often face funding pressure because they have limited access to the interbank funding that banks have, the report said.

Ant Micro Loan, an affiliate of Alibaba Group Holding Limited, in December 2014 became one of the first small loan lenders approved by the China Insurance Regulatory Commission to issue asset-backed securities backed by micro loans.

Lee believes the deal highlights that securitization can help fund micro loan lenders' activities, and be an important funding avenue for such groups with ambitions to grow their Internet finance business.

Securitization involves pooling contractual debt and selling it to third-party investors as securities. The principal and interest on the debt is paid back to investors regularly.