Dampened market conditions take toll on loan-deposit ratio

An indication of depressing mood in the local market, private banks in the Northern Marianas have reported a decline in the ratio of loans as against the deposit in the first quarter of the year from the year ago of the same period.

Loan to deposit ration dropped 4.5 percent from 55.6 percent in the first three months of 1999 to 51.1 during the same period this year, a report obtained from the Banking Division of the commerce department disclosed.

According to Commerce acting Secretary David S. Palacios, market conditions are the main factors that determine the acceptable loan to deposit ration in a particular economy.

Records obtained from the Department of Commerce disclosed the average loan to deposit ratio in the Northern Marianas continues to be within the 50-percent mark, 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.

“All banks, except for one, have a loan to deposit ratio of 49 percent or higher.
Deposits that are not loaned out are remitted to the head office,” Mr. Palacios explained.

Loan agreements approved by banks for private clients fell three percent in the January-March 2000 period to $285.565 million from the year ago’s $294.774 million.

Consumer loans dropped 10 percent to $72.702 million in the first quarter of the year from last year of the same period’s $80.360 million, in what finance analysts said was a diminishing confidence on the borrowers’ capability to pay back due to economic contraction.

Private banks have also taken a stricter approach on commercial loans which manifested a modest fall of 0.7 percent to $163.389 million from last year’s first quarter tally of $$164.466 million.

Increased activity in home improvement like renovation spurred the marginal increase of 0.3 percent in real estate loans approved by banking companies, reaching $49.474 million in the first three months of 2000 from last year’s $49.348.

The decline in loans approved by banking companies for private-sector packages dragged overall tally down 0.5 percent from last year’s $294.620 million to $293 million in the January-March 2000 period.

During the same period, banking division records disclosed private and government deposits increased from $529.5 million last year to $573.4 million in the first quarter of the year 2000.

Officials said the increase in the volume of deposits and the modest drop in approved loan agreements explain the 4.5 percent decline in the loan to deposit ratio, coupled with current market conditions on the island.

At the same time, 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.