CDA warned of bad loans •Banks face high risks in lending due to guarantee lack

As the Commonwealth Development Authority remains the biggest source of financing in the Northern Marianas, a financial expert has urged CDA to reduce delinquency ratio by making sure that it only provides quality loans.

An analysis on the CNMI’s financing needs by David Burger, director of Burger & Comer, a public accounting firm, revealed that CDA has lent out over $46 million from 1986 to 1997, a huge chunk of which was granted to consolidate the various debts of a long-established company. Burger made a comparative analysis of the finance conditions and needs in the CNMI and Guam during last week’s economic conference.

During the economic boom on the island, a huge amount of loans to build apartments were made, an area which Burger believes the authority should not focus on. CDA’s third biggest category of loans was in fishing where it encouraged entrepreneurs to pursue this type of business.

At the end of 1997, the authority had a reserve for bad loans of more than $9 million, equal to roughly 30 percent of the outstanding loans. The figure shows that the risk is higher in the CNMI which explains why banks in the Northern Marianas charge higher interest than on Guam, he said.

High interest

Due to land ownership issues and the lack of a real estate market, traditional mortgage financing in the CNMI has been offered on less attractive terms than those available on Guam or the US mainland.

Burger noted that people can borrow money at a fixed rate of less than 8 percent for 30 years to buy a house on Guam while the best rate on Saipan is 10 percent.

“I can tell you that banks in the CNMI do not pay higher interest on your deposits than their Guam branches do, yet they charge higher interest rates on their loans than their Guam branches do,” he added.

High risk

Bankers on the island said credit risk in the CNMI is much higher because since banks cannot take title to the property, they have difficulty in foreclosing and holding property securing loans.

Other reasons given by the banks are the island’s heavy reliance on non-resident workers and the uncertainties about the future economic viability caused by this dependence on foreign labor.

Data from the Saipan Bankers’ Association revealed that a huge amount of money is not circulating in the CNMI because as much as 70 or 80 percent of all deposits taken in are sent off-island.

While loans usually take up 70 to 75 percent of the total deposits in the banking industry, Burger said some banks in the CNMI have lent out as little as 20 to 30 percent of their deposits.

The two main reasons cited by the bankers for doing this, were there was not enough demand for good loans and problem in securing collateral for many loans, he added.

Financing sources

One area which the CNMI may tap as a source of development financing is the Small Business Administration which caters to clients that are starting businesses or carrying out expansion plans, according to Burger.

SBA does not grant loans directly but guarantee loans that are granted by local banks. It can guaranty 75 percent of a bank loan (80 percent if the loan is less than $100,000) up to a maximum guarantee of $750,000.

If a borrower already has good credit, the SBA has a program requiring very little documentation for loans of up to $150,000. It also offers technical assistance to startup businesses, including free preparation of business plans.

Venture capital is another area for development financing in the CNMI. However, since banks consider credit risk in the CNMI high, there is very little likelihood of attracting venture capital money for the island. Venture capital firms in the US mainland provide financing for startup companies which take significant ownership or position in the firms.

The CNMI government can help in the economic development through the issuance of bonds when its finances improves since issuance of bonds requires obtaining a credit rating.

In attracting development capital for financing, the Northern Marianas must first identify what type of industries the government wants to attract, next it should understand the magnitude of the investment and key players in the industry as well as the investor’s financial condition.

Burger said the island must also assess its ability to provide financing as large projects cannot be financed locally. Local banks can help promote investment by offering interest rates comparable to those available in the US mainland and Guam.