Reserve Bank governor Graeme Wheeler has warned excessive credit growth may trip up New Zealand's economic rebalancing and has singled out agricultural debt as being uncomfortably high in the latest financial stability report.

Credit growth is necessary to stoke economic activity, but if it goes too fast it could increase the country's vulnerability to international shocks and heighten housing market imbalances, Wheeler said.

Households have generally cut back their debt levels as the economy shifts toward increased private savings. Still, agricultural debt has picked up to an annual pace of growth of 4.5 per cent from the start of the year and the sector is vulnerable at elevated levels.

"Household debt remains at relatively high levels, with many borrowers still vulnerable, especially to any correction in house prices," Wheeler said in a statement in Wellington. "Leverage in parts of the agriculture sector also remains high, leaving the sector exposed to a fall in export prices."


The twice-yearly financial stability report updates the central bank's view on the health of the country's finance sector, and comes after new governor Wheeler's first monetary policy review last month where he kept the official cash rate at 2.5 per cent.

The central bank said dairy is "more vulnerable to a sharp decline in payout than at the time of the peak in dairy prices" with aggregate debt higher than in 2007/08, and more tightly held among the most indebted farmers.

"Declining farm land prices have eroded the equity buffers of indebted farmers, implying banks would consider foreclosing on a larger proportion of farms if the payout fell sharply and was expected to remain weak," the report said.

New Zealand households have started taking on more debt in recent months as the housing market picks up, and lending criteria has loosened with banks offering more high loan-to-value-ratio loans.

"If credit demand was to strengthen significantly, and banks were willing and able to accommodate that demand, indebtedness (relative to income) could resume an upward trend, eroding households' resilience to shocks," the bank said.

Business lending has largely been restricted to large corporates and low-risk ventures, meaning small and medium sized enterprises have struggled to find credit, the bank said.

That's been exacerbated by the collapse of the non-bank finance sector, which has traditionally offered loans to riskier enterprises.

Gains in private sector balance sheets have been offset by increasing government deficits, and the central bank said the public sector needs to improve its finances to bolster the nation's exposure to global markets.

Wheeler said New Zealand's financial stability has improved since the May report as international markets settle down after various measures have been taken to bolster the global system, including the Federal Reserve's latest round of quantitative easing and the European Central Bank's steps to shore up the euro-zone.

Deputy governor Grant Spencer said the country's banks have improved their liquidity and buffers and are well placed to meet the increased core funding ratio of 75 per cent, which starts from next year.

Increased term deposit bases have meant local lenders haven't had to turn to international markets for wholesale funding, which is still more expensive than sourcing cash locally.