NMI banks fail to meet industry standards on loan to deposit ratio

Not only does restriction on land ownership here hampers the growth of the real estate market in the Northern Marianas, the issue also impedes the ability of private banks to reach the industry’s target loan to deposit ratio.

Records obtained from the Department of Commerce disclosed that the average loan to deposit ratio in the Northern Marianas is below 50 percent, a figure that is far lower than the local industry standards.

According to the Saipan Bankers’ Association, the target loan to deposit ratio in the Northern Marianas is 70 percent, which is lower than the Guam banking industry’s standard of 80 percent.

Restrictions on land ownership on the island, as guaranteed by Article 12 in the CNMI Constitution, topped the very few reasons cited by bank officials in the industry’s failure to meet the standard 70 percent loan to deposit ratio.

Private banks in the CNMI can only take the title to real estate for a limited time, which brings about difficulties in foreclosing on loans secured by real property.

Aside from the Article 12 restrictions, CNMI bankers also said the local banking sector lags behind the industry standard on the loan to deposit ratio because of the lack of active real estate market on the islands.

Banks also cited as reason to its inability to meet the industry standard the Commonwealth’s heavy reliance on nonresident workers and the uncertainties about future economic viability caused by this dependence on foreign labor.

Actual loan to deposit ratios at the end of 1998 were 30 percent for Bank of Hawaii and 60 percent for Bank of Guam, according to a report from the Saipan Bankers’ Association.

Banking institutions in the Northern Marianas were forced to carry out a more cautious approach in credit applications last year due to the borrowers virtually crippled ability 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.

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.

The growth in real estate loans was attributed to the partnership forged between the Commonwealth Development Authority 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.

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.

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.