The continued rise in loans to the agriculture sector and sharp slowdown of loan growth to the business sector explains why the Reserve Bank is so concerned about state of credit in the economy.

Loan to agriculture currently accounts for 15% of total bank lending in NZ, and is up from around 10% a few years ago.

The growth rate is out of sync with income levels of farmers with the result that debt-to-earnings and debt-servicing ratios have gone up.

The worry is the debt may reach a level where it may no longer be sustainable specially when commodity prices continue to decline.

In its Financial Stability Report earlier this month, the Reserve Bank noted, “Leverage to agriculture sector remains high following rapid growth in borrowing in recent years as commodity prices increased sharply, pushing up rural land prices.”

“Dairy farms remain most at risk ... as lower payouts from Fonterra lead to a sharp reduction in budgeted revenues,” the Reserve Bank warned.

Its warning was timely because just a few days later Fonterra announced a forecast payout of $4.55 for the 2009/10 season, a 75c drop from its earlier forecast of $5.20.

According to the latest data from the Reserve Bank, loans to the agriculture sector rose by 21% year-on-year while loans to businesses rose a modest 6.8% and housing loans grew just 2.9%.

Significantly, consumer loans fell for the third month in a row, and in April the pace of fall was the steepest at 0.5%.

From low double-digit growth for most of the 2007, agriculture loans rose significantly from March 2008, peaking at 22.9% in January 2009.

In the latest April month, agriculture loans grew 21% to a record $45 billion.

Housing loans grew at 2.9%, their slowest rate since the data was introduced. Loan growth to the business sector is at its lowest level since March 2004.

The Reserve Bank noted the fast pace of decline in credit to households and business over the past year and while acknowledging that part of the reason was the softening in activity, it also said that banks and other lenders have tightened lending criteria quite significantly.

“We are continuing to watch developments on this front closely since the continued availability of credit is necessary to ensure an economic recovery,”