Banks note shrinking market for loans

Banking institutions in the Northern Marianas have noted an increasing disparity between the volume of loan and deposit transactions since the adverse impacts of the Asian financial crisis started fanning toward the CNMI.

The amount of loans over deposits during the third quarter of the year dropped to 42.4 percent from 54 percent in the same period in 1999, according to a report obtained from the Department of Commerce.

Six of the eight banks in the Northern Marianas registered growth in the amount of deposits in the same period while more loans are being paid out and fewer transactions for new applications are being processed.

Bank officials were, however, quick to point out that the shrinking amount of outstanding loans is actually caused by the trickling number of people and businesses seeking additional funds through credit packages.

First Hawaiian Bank Saipan Branch Manager Robert I. Gardiner explained competition among industry players for borrowers have become tougher primarily because the economic crisis has weakened prospective clients’ ability to pay.

Mr. Gardiner said revenue-generating capabilities are normally weak and properties are usually appraised lower than they used to during economic difficulties, making it harder for some borrowers to strike a credit deal.

Government officials said the process wherein finance companies like banks identify which of the prospective customers have the stronger ability to pay back practically eliminates the segment in the community which is less likely to obtain loans.

Financing companies end up competing against each other over the smaller number of customers who can qualify to obtain a credit, they said, adding that this result to the sharp decline in the amount of outstanding loans.

Overall amount of loan agreements approved by eight commercial and savings banks in the Northern Marianas shrunk by $44.5 million to $255.7 million in the third quarter of the year from the year ago of the same period’s $300.2 million.

According to a report prepared by Jesse Palacios of the commerce department’s Banking Division, only loan agreements with the Commonwealth government registered growth in the period under review.

Banks have loaned out $10.7 million to the CNMI government in the July-September 2000 period, jumping 24.4 percent or increasing by about $10.3 million, from last year’s $422,000, the Quarterly Banking Report disclosed.

Slowdown in business activities sine 1997 also prompted banks to pull down lending base for commercial loans, which are usually given to businesses, by 21 percent which translates to around $36.75 million.

During the July-September 2000 period, private banks operating in the CNMI approved the release of only $136.69 million in consumer loans, down from the previous year of the same quarter’s $173.34 million.

Slowdown in construction activities also pulled down real estate loans by a whooping 26 percent from $51.521 million to $38.286 million, or a difference of more than $13 million, according to the commerce department’s report.

At the same, Mr. Gardiner said customers have become more aware of the varying packages offered by different banking and financing companies on the island as they have started shopping for the best interest rates.

He said the current slowdown in lending activities is more of market-driven, pointing out that banks make money out of loans that are made. “We would want to loan out more as much as possible but the demand is not there.”

Commerce officials said the major fall in the ratio of loans as against deposits during the third quarter of 2000 indicates the persistence of the adverse effects of the Asian financial upheavals in the Northern Marianas economy.

Market conditions are the main factors that determine the acceptable loan to deposit ratio in a particular economy, said officials from the commerce department.

Government records disclosed the average loan to deposit ratio in the Northern Marianas was persistently within the 50-percent mark before it fell to 42.9 percent in the second quarter of the year, 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.