The Reserve Bank has told retail banks not to be too cautious on new lending over the next 12 months, saying the country's recovery depends on it.
The central bank's deputy governor Geoff Bascand issued the warning during a speech today about the outlook of the banking sector.
"To some degree banks have tightened serviceability, assessments and interest rate margins. Much of this has been limited to the more risky sectors [such as] commercial property and dairy - areas that the banks were already tightening in before Covid.
"But, there is some indication banks are looking a little bit more cautiously at [all] lending prospects."
He said while hunkering down might seem like the optimum response, now was the time to rely on the buffers banks had built over the years.
Bascand said banks' initial response to customers was good, with 14 percent of mortgages restructured within the first month of the crisis.
He said a decision on whether to extend that scheme - which is due to finish in September - would be made in about a week.
"We want to avoid making things more difficult by an abrupt conclusion to the capital relief regime. What we're trying to work through is how we transition out of it."
He said retail banks faced a number of challenges post-Covid, not least bad debts, which would rise, but also pressure on profits due to low interest rates.
Open banking and competition from Financial Technology (FinTechs), climate change, financial inclusion and growing cyber risks also featured as risks to watch.
"We've estimated that there's a 5 percent - one in 20 - chance that in any given year a cyber incident could cost $2 billion or more - a third of the banking sector's profit."
Bascand said the pandemic had also highlighted that more work needed to be done when it came to supporting Māori communities and economies.
"For example the difficulty of securing lending against collectively-owned land. There's great opportunity... we have to find a way to get through this and leverage the opportunities that are there."
He said overall the banking system needed greater internal investment in technology, customer management and risk management and said it would need to carefully balance the expectations of customers, investors and its regulators going forward.