(Updates with details and background) SHANGHAI, May 27 (Reuters) - Chinese regulators have allowed smaller banks to borrow more from overseas, three sources with direct knowledge of the matter said, a move that mainly benefits the local branches of foreign banks who have reported a shortage of foreign-currency capital. The sources told Reuters that some of these lenders lobbied against changes to cross-border financing rules at the start of the year which have significantly lowered their loan portfolios. Some of the foreign banks in China had been forced by these regulations to significantly reduce foreign exchange loans to Chinese domestic clients, while some held these loans on their books at levels many times higher than required. China’s central bank has now raised the cross-border financial leverage ratio at some commercial banks which have a capital base of less than 100 billion yuan ($15.7 billion), to 2 from 0.8, a document seen by Reuters shows. The same document also shows the central bank has granted qualified commercial banks an initial financing quota of 10 billion yuan ($1.57 billion). The adjustments, which came into effect from May 25, followed a meeting between Yi Gang, the Governor of the People’s Bank of China (PBOC), and a delegation of foreign banks discussing the development of foreign banks in China. The sources said they mainly targeted the Chinese branches of foreign banks. Official central bank data showed that the balance of China’s foreign currency loans stood at $923.2 billion at end-April, up 10.8% from a year earlier, while foreign currency deposits hit a historic high of $1 trillion. China’s central bank had tightened the way it assesses cross-border financing risks to make it harder for domestic firms to raise funds in overseas markets. ($1 = 6.3757 Chinese yuan) (Reporting by Cheng Leng, Winni Zhou and Tony Munroe; Editing by John Stonestreet and Alexander Smith) Our Standards: The Thomson Reuters Trust Principles.