By Gareth Vaughan
The Reserve Bank has reminded banks and businesses that a return to "modest" levels of lending growth to a deleveraging business sector is required if an economic recovery is to be sustained.
In the latest of its bi-annual financial stability reports the Reserve Bank notes that overall annual lending growth has fallen from more than 15% in 2007, prior to the global financial crisis, to just 0.3% in the year to September 2010.
The central bank's Financial Stability Report says bank lending to business is "particularly weak" compared to previous economic cycles. The latest monthly data from the Reserve Bank shows business lending, as of September, down 7.6% year-on-year to NZ$71.46 billion. Month-on-month the September total is down NZ$265 million from August.
The dramatic drop in business credit led ANZ's chief economist Cameron Bagrie to suggest recently that businesses had deleveraged to the extent that many now had "lazy balance sheets."
The Reserve Bank suggests that banks generally remain willing to lend to credit worthy businesses and should be well placed to do so, having only suffered "modest" loan losses through the recession.
"It is important that the banks continue to lend to businesses on reasonable terms,' the Reserve Bank says.
"A return to modest rates of credit growth will be necessary to sustain economic recovery."
It notes that the cost of borrowing for businesses is higher relative to the Official Cash Rate than in the past, which is probably contributing to the "perceived tightening" of credit conditions in the business sector.
"This at least partly reflects higher funding costs for banks," the Reserve Bank says.
"The higher cost of credit, continued weakness in the domestic economy, and a reduced appetite for debt continue to drive weak demand for bank credit from businesses."
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