UPDATE 1-Australia loosens lending laws to revive coronavirus-hit economy

(Adds share price of banks, financial index)

SYDNEY, Sept 25 (Reuters) - Australia said on Friday it would simplify bank lending rules to free up credit in a bid to stimulate the economy, which slid into its first recession in nearly 30 years due to the coronavirus pandemic.

Shares of Australia's "Big Four" banks rallied after the announcement in early trade, with the heavyweight financial sector surging more than 3%. The benchmark index was up more than 1%.

National Australia Bank and Westpac Banking rose nearly 6%, while Commonwealth Bank of Australia was up more than 2%. Australia and New Zealand Banking Group rose nearly 5%.

The changes will ease the regulatory burden and reduce the cost and time faced by consumers and small businesses seeking to access credit, Federal Treasurer Josh Frydenberg said.

"The flow of credit will be absolutely critical to our economic recovery," Frydenberg told reporters in Canberra.

"But our current regulatory framework, with respect to lending, is not fit for the purpose. It has become overly prescriptive, and responsible lending has become restrictive lending."

Though credit is cheap now with interest rates at record lows, consumers have found it more difficult to obtain the loans they seek, with many giving up due to tough lending laws.

"We need our banks to be extending credit, we need the regulation to be streamlined, and we need customers to be able to access credit," the treasurer said.

Coronavirus pandemic has taken a heavy toll on Australia's economy. To cushion the blow, the Prime Minister Scott Morrison's conservative government has relaxed several rules for businesses and rolled out stimulus packages worth about A$314 billion ($221 billion).

The decision to overhaul credit rules comes a day after Australia unveiled its biggest shakeup in bankruptcy laws in nearly three decades, allowing small businesses to trade while insolvent and take more control over debt restructuring.

($1 = 1.4192 Australian dollars) (Reporting by Renju Jose; Editing by Sam Holmes)