China's top banking regulator says the sector should continue to help cut industrial overcapacity and avoid financial risks.

The banking sector used 14 trillion yuan in the first half of this year to support China's real economy. That's according to Shang Fulin, chairman of the China Banking Regulatory Commission.

Shang said Tuesday at the seventh annual meeting of China's banking association in Beijing that the country needs to continue advancing economic restructuring.

Shang said that companies' average borrowing rate has decreased about 1.3 percentage points from last year, and that lower financing costs have bolstered the restructuring effort.

However, he said it was urgent to reduce the number of so-called zombie companies, or those businesses could only stay afloat through constant borrowing.

"We will catalogue non-operating companies and those have overcapacity. We will also strengthen the stress-test on mortgages, to avoid risks on non-performing loans," Shang said.

Shang said that companies unable to pay off their loans will sour banks’ liquidity. He also said more business are turning away debt these days.

"Now the situation where businesses are escaping bank loans is rather serious," he said.

"Even large-scale, state-owned enterprises have begun to evade debts. If the situation becomes normal, it would sabotage our credit environment, and eventually our economic system."

China's economic slowdown has squeezed business profits and dragged on the banking sector's performance. The non-performing loan ratio stood at 1.75 percent by the first half-year. The regulator's task remains challenging -- retain the bad loans ratio while locating fresh economic drivers.