Banking regulator launches debt committee plan to better handle troubled borrowers

Committees should safeguard rights and interests of banks and also organise orderly debt restructuring for firms

PUBLISHED : Friday, 09 September, 2016, 9:20pm
UPDATED : Friday, 09 September, 2016, 9:20pm

China’s banking industry has suffered a setback in its ability to enforce creditors’ rights, after the nation’s banking regulator issued a formal guidance on Friday saying they are no longer allowed to individually stop lending or recalling loans from troubled corporates.

The guidance, issued in a notice on The China Banking Regulatory Commission’s website, is designed to help big state-owned enterprises and over-capacity industries weather the challenging economy, said analysts.

But the terms will make debt recovery by banks more difficult, even as the number of non-performing loans continues to rise as firms get into financial difficulties and are unable to repay their loans.

In a default, both lender and borrower must now agree before companies can be put on debt restructuring proceedings.

Creditors of troubled Chinese firms must also set up debt committees to assist with debt restructuring, the regulator said.

It’s a development made with good intentions, but it could be troubling in reality. Local governments can now take advantage of the guidance to keep the banks lending
Shujin Chen, research director, DBS Vickers

A committee must be set up for any troubled firm which is seriously in debt by three or more of its creditors. They should negotiate the terms of any restructuring and will have to approve any motions for the defaulting companies.

The notice said no bank may recall loans on its own, even if it has already suffered from non-payments, or if a borrower is assessed to be a bad risk.

And companies are also now entitled to keep tapping their lenders for new funds to remain in business.

The banks have been told any actions they take against bad debtors must be in line with the central government’s macroeconomic policies, policies on individual sectors, and those on money supply directives.

“In the long-term, the state’s and the banking industry’s interests are usually in line. But in the near term, with the economic cycle now moving adversely, this is not the case,” said Shujin Chen, research director at DBS Vickers.

“Banks need to see how industries are faring within a five-year horizon when they make credit decisions,” she said, adding he viewed the move as a step backwards from the policies introduced in 2013, which were aimed at reining in local bad debt, and ridding the economy of inefficient companies.

“It’s a development made with good intentions, but it could be troubling in reality. Local governments can now take advantage of the guidance to keep the banks lending.”

Tony Tang, head of corporate ratings at Dagong Global Credit, called the move “a follow-up measure from the regulators, on the hot topic of debt-equity swap”, that came out earlier this year.

“The main purpose is to help troubled corporates to survive and avoid bankruptcy that could trigger domino effect.”

Tang said there have been attempts this year by banks to try to negotiate with difficult borrowers using credit committees, and that by formalising the practise, he believed the latest move could be positive for the industry.

“The mechanism will help negotiations and communications between creditors and borrowers. A packaged deal can save borrowers trouble and money,” he added.

“But this is just a mechanism to make the process more balanced and smoother for all parties. It doesn’t mean a waiver of debt and liability. It won’t solve the fundamental over-leverage problem.”

Ben Way, Asia chief executive of Macquarie, said the biggest challenge is currently allocation of credit.

“The problem we’ve got today is we’ve still got state-owned enterprises accounting for about 75 per cent of the debt. But if you look at SOEs, they account for about 25 per cent of the economy.”

“That’s a massive mismatch of one group of people getting massive over-allocation of credit,” he said, adding that he believes the better medicine for the China’s economy would be to give equal access of credit to different interests.

“To nurture entrepreneurism, it is better to give access to capital to different sets of groups, fundamentally enabling the cities to move much quicker than they are today,” he said.