High delinquency rate forced CDA to go slow in lending

The increase in the volume of unpaid loans, manifested by the 13 percent delinquency rate in 1999, has forced the Commonwealth Development Authority to go slow in its lending activities since the beginning of last year.

Between January and September 1999, the government’s lending arm approved only about $6 million in total loans, which is far below when compared to even the previous year’s third quarter at $8.8 million.

Only about $1 million worth of direct and guaranteed loans were injected into the local economy during the third quarter of last year, lower than the previous period’s $5.2 million.

Development Authority Board Chair John S. Tenorio said the high volume of loans approved during the third quarter of 1998, amounting to $8.8 million, was spurred by cash demand from businesses that were hurt by the economic slump.

Records obtained from the Economic Development Division of the Department of Commerce showed that CDA approved $5.1 million in guaranteed loans during the second quarter of 1999, up from the previous year’s $200,000.

Mr. Tenorio said the fact that more businesses have resorted to securing loans from both government and private financial institutions during that period clearly indicated economic hardship.

For the first nine months of 1999, CDA assisted consumer and commercial borrowers secure close to $6 million in total guarantee loans. The agency released only about $700,000 in direct loans during the same period.

Overall loans approved by the development authority in 1998 reached $20 million, at least $18 million of which were commercial guaranteed while $2 million were direct loans.

The figure dropped by half a million dollars from the 1997 tally mainly because commercial banks have slowed down in their lending due to the risk of the borrowers not being able to pay back.

Government records disclosed loans approved by private banks in the CNMI fell by $12 million to $288 million during the fourth quarter of last year from the previous period’s $300 million.

Banking officials said private financial institutions have adopted a more cautious, conservative approach in processing loan applications due to the worsening economic conditions in the islands.

Financial institutions may also consider freezing any expansion on their respective lending base until the local economy shows significant signs of improvement or when the borrowers’ capability to repay loans is stronger.

As of end-December 1999, real estate loans registered growth at $53.4 million compared with the third quarter level of $51.5 million, according to a report from the Banking and Insurance Division of the commerce department.

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.

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. CDA registered a 15 percent delinquency rate last year, climbing up by more than half from the previous seven percent.