Banks cut lending base by 11% in 2Q

Still very cautious on the local borrowers’ ability to pay mainly because of the slow recovery of the island’s economy, banking institutions in the Northern Marianas have reduced overall lending base by 11 percent in the second quarter of the year.

A quarterly report obtained from the commerce department’s Banking and Insurance Division disclosed loan agreements approved by banks in the April-June 2000 period amounted to $260.9 million, down by 11 percent from the previous quarter’s $293 million.

Private loans fell 12 percent in the same period to $252.106 million from the previous quarter’s $285.565 million, although real estate loans registered a modest growth of two percent to exceed the $50 million-mark from $49.5 million in the first three months of the year.

Growth in real estate loans was spurred primarily by the increased activity in home improvement like renovation, according to commerce officials.

The overall reduction in total volume of loans approved by CNMI banks was mitigated by the significant increase of 18 percent in government loans during the April-June 2000 period, compared with the quarter-ago.

Commerce department records showed banks approved a total of $8.765 million in government loans between April and June this year. In the first three months of 2000, some $7.435 million in total credit agreements were entered into with the CNMI government.

The interim financing agreement sealed by the CNMI government though the Commonwealth Development Authority with the Bank of Guam early this year provided the necessary push in overall loan figures for the period under review.

The money loaned out by Bank of Guam to the Commonwealth government will be used to fund major infrastructure projects identified in the Covenant 702 CIP Master Plan.

Consumer loans also suffered a setback, declining by 3.3 percent from $72.702 million in the January-March period to $70.286 in the second quarter of the calendar year, in what analysts said was a diminishing confidence on the borrowers’ capability to pay back due to economic upheavals.

Private banks have also taken a stricter approach on commercial loans which manifested a dramatic fall of about 20 percent to $131.477 from the previous period’s $163.389.

Loan to deposit ratio

Decline in the overall number of approved loan agreements dragged loan-to-deposit ratio 16 percent from 51.1 percent in the first three months of the calendar year to only 42.9 percent in the April-June period.

Loan to deposit ratio dropped 4.5 percent from 55.6 percent in the first three months of 1999 to 51.1 during the same period this year.

Records obtained from the Department of Commerce disclosed the average loan to deposit ratio in the Northern Marianas continues to be within the 50-percent mark, a figure that is far lower than the local industry standards.

The target loan to deposit ratio in the Northern Marianas is at least 70 percent, which is lower than the Guam banking industry’s standard of 80 percent.

Officials said the increase in the volume of deposits and the modest drop in approved loan agreements explain the decline in the loan to deposit ratio, coupled with current market conditions on the island.

At the same time, restrictions on land ownership on the island, as guaranteed by Article 12 in the CNMI Constitution, topped the very few reasons cited by bank officials in the industry’s failure to meet the standard 70 percent loan to deposit ratio.

In the last quarter of 1999, bank loans shrunk 0.5 percent to $288.3 million compared with the same period the previous year despite growing demand for cash due to worsening economic condition.

Consumer loans fell 10 percent from $83.6 million during the fourth quarter of 1998 to $74.7 million in the same period last year, due to a dramatic cut down on spending.

Despite a massive refinancing of loans by property owners since a big chunk of commercial and residential spaces are literally empty, real estate loans dropped 0.2 percent to $53.4 million during the same period from $54.7 million in 1998.

Money borrowed for commercial purposes edged downward 0.3 percent to $159.9 million from $165.3 million. Commerce officials said this is a strong indication that economic activities on the island are yet to pick up from the Asian crisis.

Finance analysts said private banks may freeze any expansion on their respective lending base until the local economy shows significant signs of improvement or when borrowers’ capability to repay loans is stronger.

The slowdown in banks’ loan application approval will particularly impact service-type establishments or businesses related to the CNMI’s billion-dollar tourism industry which has been badly hurt by the regional recession.