Problem loans besieged CDA in 2000

Economic slowdown during the past 12 months has given birth to a distressing growth in the number of remiss borrowers, indicated by reports that at least 20 percent of all loans issued by the Commonwealth Development Authority became delinquent this year.

By end-December 1999, CDA recorded a 15-percent delinquency rate.

According to CDA Board Chair John S. Tenorio, the increase in the number of delinquent borrowers could easily translate to more than $2 million in unpaid and overdue receivables from the agency’s $80 million portfolio each year.

The government-controlled financial institution’s monthly collections fell by more than 40 percent from the average $700,000 last year to only $400,000 this year.

CDA officials are however quick to point out that a big slice of overdue loan payment receivables are actually a product of a payment scheme which gives borrowers longer grace period to settle their outstanding credit.

The new measure also restructures debts provided by CDA in what seems to be a major step taken to help businesses keep afloat in light of the CNMI’s contracting economy.

Under existing local statutes, loans are considered non-performing if borrowers failed to service their monthly obligation within 90 days.

Still, the current delinquency rate is still lower compared with those of other island-nations in the Pacific which can be attributed to the programs extended by CDA to its borrowers that include a flexible payment scheme.

CDA has been working out with borrowers on an agreeable reduced amount to prevent any setback in the payment of their loans, as he remains confident the new payment scheme will work to the advantage of both the agency and the borrowers.

The flexible payment scheme was instituted to prevent more foreclosures, especially by businesses who have existing loans from the development authority.

Mr. Tenorio believes that the increasing delinquency rate indicate that local businesses continue to crumble from the adverse effects of the worst economic crisis ever to hit the region, which drew fewer visitors into the Northern Marianas.

Loans issued to borrowers who ventured into apartment-type businesses are the major contributor to the high delinquency rate reported by the development authority, said Mr. Tenorio, adding that only about 40 percent of loans approved by the agency for apartment-type businesses have been paid so far.

Mr. Tenorio said CDA stopped issuing loans for such ventures since six years ago while pointing out that the credits involved between 15- and 20-year payment agreements which explains why more than half of the loans remain unpaid.

Government records disclosed that the second largest category of loans issued by CDA was for apartments; the third largest was for fishing.

At the end of 1997, CDA had a reserve for bad loans of more than $9 million, equivalent to roughly 30 percent of the outstanding loans.

This, coupled with the adverse effects of the regional economic contraction, has apparently resulted to a sharp increase in the number of delinquent borrowers.

From 1986 to 1997, CDA lent out over $46 million, granting the single largest loan ever for the consolidation of various debts of a long-established company in the Northern Marianas.

Economic driver

In order to prevent further increase in the number of problem loans, CDA has taken a new tact aimed at helping clients cut down on expenses to make it through the hard economic times. This strategy replaced previous actions which involved the release of additional funds for distressed businesses.

CDA has consistently provided millions of dollars in fresh capital to local entrepreneurs, making the agency one of the major factors which facilitated robust growth of the CNMI economy.

Records disclosed an increasing trend in the amount of loan agreements sealed by the government-owned lending agency with its clients in a four-year period covering 1996 to 1999, reaching over $26 million.

However, economic upheavals brought about by the financially devastating Asian currency crisis had taken its toll on the total volume of credit agreements approved by the development authority last year.

According to a report obtained from the CNMI Department of Commerce, 1999 marked the first time when total amount of loan packages okayed by CDA dropped in three years, falling by about 22 percent to $6.5 million from the year ago’s $8.3 million.

CDA officials have also projected another decline in the volume of loan agreements sealed this year, as it intensifies efforts to cut the increasing number of non-performing and problem loans due to the borrowers’ weaker re-payment ability.

In fact, CDA has not awarded a single loan in the first three months of the year, in line with its decision to slowdown on lending amid the borrowers’ crippled ability to service their outstanding credits.

Back in 1999, the development authority has consistently awarded an average of $1.625 million in each quarter which is, however, lower than the previous year’s $2.075 quarterly average or when the CNMI economy was yet to feel the pinch of the regional recession.

CDA had been approving an average of more than a million dollars in both direct and guaranteed loan in each quarter of 1996 and 1997, the Quarterly Economic Review of the commerce department disclosed.

New tact

Business experts from the development authority have been mobilized to call borrowers who have delinquent accounts for a series of consultation meetings, which CDA holds to identify problems that affect the ability of its clients to pay their dues on time.

“Injection of new money will create more problems because it will mean additional financial obligation on the part of the clients amid slow business activity,” said CDA Executive Director Marylou S. Ada.

As an alternative, CDA provides delinquent clients with technical assistance that include business consultation sessions wherein ways to bring their respective fiscal house in order are discussed.

According to Ms. Ada, this process includes the payment flexibility given to CDA borrowers who are not able to regularly pay their outstanding loans on the approved amount.

She explained that although a bigger portion of CDA clients have continued to service their loans on time, most of them have asked the lending agency if they can pay at an amount lower than what was approved in the agreement.

At the same time, delinquent borrowers are also asked to consider other means that would help cut down their operational expenses both in manpower and overhead costs.

Ms. Ada also said that service-providers are followed by companies that have ventured into the commercial and residential structures in the list of CDA’s top remiss clients.

This has been the case because a big number of businesses that were put up by CDA clients were not properly planned, while some have rushed to expansion without putting into consideration the market’s volatility.

Ms. Ada also mentioned some clients who were granted loans for a specific business but actually ventured into other areas, aside from the originally approved undertaking.