Regulator calls for banks to form creditors' committees

A recent notice issued by the China Banking Regulatory Commission required banking institutions to step up creditor's rights management, to maintain financial order, and to do well the job of creditors' committees, thus guiding companies through debt restructuring and helping them out of difficulties.

The CBRC defined a creditors' committee as a temporary organization set up by at least three banking institutions, which are creditors of a company that has difficulty in repaying a large amount of debt.

Based on negotiations and self-discipline, members of the creditor's committee will form a joint credit management mechanism and make concerted action to do their best in relieving a company from debt, rather than recalling loans in advance or stop lending to the company. This will also prevent the debts of multiple banks from turning sour because one bank recalled a company's loans in advance.

The CBRC Henan Office started to establish creditor's committees for 535 companies in March. Each of the companies recorded debts of more than 300 million yuan ($45 million) and borrowed from more than three banks. Their total loan balance associated with the creditor's committees reached 905.79 billion yuan, accounting for 45 percent of the corporate loan balance of the banking sector in Henan province.

Zhang Chun, deputy director of the CBRC Henan Office, said members of a creditor's committee may have different opinions on how to deal with a company in debt trouble. Some would like to recall loans as soon as possible and stop lending to the company; some still want to help the company by extending less loans; others want to use financial instruments to hedge debt risks. The banking regulator will help them negotiate and reach a consensus.

"Previously, all the banks were eager to give financial support to a company when its business was good, but none of them was responsible for long-term development of the company. The banks granted excessive loans to a company without effective communication with each other. The company later developed subsidiary businesses and ran into trouble during an economic downturn," he said.

"We are trying to solve these problems by pushing forward the creditor's committee system. Member banks of the committee will sit together with a corporate debtor to discuss how it should carry out reforms or restructuring. With a complete understanding of the company's financial information, they will decide how to help it and to what extent."

Apart from calling for banks to jointly grant credit by setting an upper limit and to tackle financial risks together, the banking regulator also encouraged information exchange among relevant banks and companies.

Zhang said by the end of this year, the CBRC Henan Office will further expand the scope of the creditor's committee system to 770 companies, of which each recorded a loan balance of more than 100 million yuan from at least three banks.