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
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
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.
