Lending base shrinks due to economic slowdown • Financial institutions may halt lending until economy improves

Slow business activities, which virtually cripple the borrowers’ ability to pay back, forced banking institutions in the Northern Marianas to carry out a more cautious approach in credit applications, resulting to a sharp decline in approved loans last year.

This, even as finance experts claim that banks continue to expand their lending base, notwithstanding higher risks of delinquency due to lower returns of income in times of economic difficulties.

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 commercial banks 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.

Development Authority Board Chair John S. Tenorio attributed the growth in real estate loans to the partnership forged between the government and commercial banks in providing home loan credits.

CDA, as of last year, approved 600 housing loans which are mostly guaranteed applications. The government’s lending arm is expecting to close more guaranteed home loan agreements this year.

CDA is currently processing 300 housing loan applications with almost half of it expected to be closed in the next couple of months while the Northern Marianas Housing Corporation targets to approve the rest within the year.

With businesses still reeling from the adverse effects of the Asian currency crisis, commercial loans dropped by $13.4 million during the fourth quarter of last year from $173.3 million in the July-September period to $159.9 million.

Consumer loans registered trifling decline to $74.7 million by end-1999 from the previous quarter’s $75 million. Government loans posted significant drop from $422,000 in the third quarter of last year to $350,000 in the October-December period.

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

Although banks continue to provide loans, financial institutions now practice a more cautious approach such as the requirement of more collateral while some have resorted to the downsizing of loan applications like those applying for a million dollar loan may have their application approved lower by at least half of the original amount.

In 1998, banking institutions in the CNMI expanded their lending base despite the ongoing recession’s risks that include crippling the borrowers’ ability to pay back due to slower business activities and lower returns of income.

Government figures noted an increase in total money loaned out by private banks in the CNMI during the fourth quarter of 1998 which amounted to $304.71 million, compared with the previous year’s $279.98 million.

However, private banks loaned out lesser money during the last three months of 1998 compared with the amount recorded during the same year’s previous quarter at about $306 million.

Commercial loans posted a slight decline in 1998 at $165.7 million from the previous year’s $166 million while consumer loans were up from $80 million in 1997 to $83.6 million the following year.

Bank experts attributed the big bulk of increase in total money loaned out to the real estate sector which posted some $21 million growth, from $32.9 million in 1997 to $54.7 million last year.