APRA has warned lenders on loosening credit standards in the face of weak mortgage demand.

Speaking at the Abacus - Australian Mutuals Convention, APRA chairman John Laker commented that lenders currently face slow credit growth. Laker warned lenders to avoid relaxing credit criteria in response to intense competition in the home loan market.

The APRA chair said the regulator supported strong competition in the mortgage market, so long as it was sustainable, and based on sound credit standards. He commented that competitive moves in the market to date had taken the form of discounted mortgage rates, but warned that lower credit standards often came "in the later stages of the competitive cycle".

Laker referred to a recent letter sent from APRA to major banks, admonishing them to maintain credit standards.

"The background to that letter was the continued upward drift in non-performing housing loan ratios and signs of emerging pressures on credit standards. Such pressures can take the form of a relaxation of loan-to-valuation or debt serviceability requirements or the introduction of new products with higher risk features," he commented.

Laker cautioned mutuals to take stock of their lending practices to ensure quality was being maintained.

"Are you clearly monitoring your institution's housing lending portfolio, with a clear focus on the quality of new lending? Are you comfortable with current credit standards? Are you tracking and closely scrutinising the level and type of lending policy exceptions? Are your provisioning practices consistent with current credit standards? Are your remuneration arrangements in this subdued market environment rewarding growth or market share targets that are being achieved by substantially higher risk-taking?" he asked.

Laker then added that the regulator had seen "isolated instances" of credit standards being sacrificed for the sake of growth.