Wednesday, Deputy Governor of the Reserve Bank of New Zealand, Grant Spencer said provisioning of banks against bad and doubtful debts are expected to increase further over the year ahead as business profits weaken and unemployment rises.

The Financial Stability Report from the RBNZ revealed that the domestic economy is set to remain weak in the coming quarters, which could impair assets further. The central bank stated that banks should maintain adequate provisions and retain capital levels sufficient to absorb unexpected losses.

Loan impairments are likely to rise again but not at the same degree as witnessed in the other economies over the last 18 months. Though major banks are in a position to access offshore funding markets, funding risks remain elevated. Lengthening the maturity profile of wholesale funding portfolios should remain a priority for banks during this year.

Spencer noted that the credit to households and businesses continued to grow but the rate of growth slowed significantly over the recent months. This was partly because New Zealand's banks tightened its lending criteria considerably. As a result, some businesses are reporting difficulties in procuring credit.

Spencer said, While current conditions warrant caution, it is important that the banks continue to lend to creditworthy borrowers.

Spencer added that major government interventions have eased stresses in the international credit markets, but the adverse second-round effects of the financial crisis on global economic activity and commodity prices will take some time to play out.

The central bank noted that downward momentum in house prices continued in the early part of 2009. However, it is still somewhat overvalued relative to fundamentals, the report said. There are some tentative signs that the price declines may start to moderate over the next few months, with buyer demand supported by inward migration and lower interest rates.

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