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December 1st, 2008
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Bracing for the crunch

NGO urges prudent credit spending as mortgage and consumer trends shift

By Claire Compton
Staff Writer, The Prague Post
August 27th, 2008 issue

MICHAEL HEITMANN/The Prague Post
Michal Kebort, here at the SOS office in Prague, advises loan seekers to have greater consumer and financial awareness.

Mindful of the mortgage and credit crises abroad, banks are taking a closer look at loan applicants and tightening qualification requirements.
Coupled with the increasing popularity of consumer loans, this trend has some watchdog groups warning local consumers to watch their spending.
As mortgage banks restrict their lending policies, rising consumer prices are tightening household budgets, leaving less room for mortgage payments. As a result, many banks are requiring customers to have higher incomes to qualify for loans.
Hypoteční banka, the second-largest Czech mortgage lender, raised its income requirements as of Aug. 1. A family of three seeking a loan of 1.5 million Kč ($90,634) must meet a monthly income threshold of 25,800 Kč, 1,300 Kč higher than the previous requirement.
At Česká spořitelna, the largest local bank in terms of clients, mortgages have been increasingly hard to come by after the bank ended its relationships with several independent dealers who brought in “lower-quality” clients, which include divorcees, entrepreneurs with lower-level education and those in professions considered unstable.
Checking up
When considering a mortgage application, Česká spořitelna looks beyond simple income, perusing the potential client’s entire financial history, said company spokeswoman Kristýna Havligerová. As a result, the total amount of the bank’s outstanding loans that are 90 days after maturity falls below one percent.
“We examine the financial situation of our clients carefully. We do not want them to find themselves in a situation where they could not repay their debts,” she said, adding that, despite the bank’s mindfulness of the mortgage crises abroad, “our mortgage portfolio is healthy, thanks to our credit scoring.”
Local banks are nevertheless finding themselves in a difficult position, balancing a need to ensure stable mortgage loans with a slump in the housing market. The Regional Development Ministry reported a 20 percent fall in mortgage loans year on year from the January–June period. In the first half of 2007, banks granted mortgages worth 74.5 billion Kč, but only 59.5 billion Kč in the same period this year.
In response to the slump, and the quarter-point interest rate cut by the Czech National Bank earlier this month, mortgage rates are being cut in kind by major banks, but will remain more expensive than a year ago, when the average rate was 4.67 percent.
Komerční banka cut its rates by 0.5 percentage points, in time for its planned autumn mortgage campaign. Česká spořitelna has cut rates 40 basis points, lowering the rate for five-year fixed period mortgages to 5.19 percent, according to Havligerová. UniCredit did the same.
While mortgages make up three-quarters of household debt, consumer loans are on the rise in contrast to mortgages, gradually eating up a larger share of debts.
Consumer loans can often cause greater problems, as consumer lenders don’t often have the same strict requirements as mortgage lenders, according to Michal Kebort from the Czech Consumers Defence Association (SOS).
“A [growing] problem is insolvency, and consumer loans contribute largely to that,” he said. “Clients are checked less for their ability to repay the loan in comparison with other [types of] loans.”
Consumer loans have enjoyed a significant increase in a year-on-year comparison of the first half of 2008. Česká spořitelna reported 20 percent growth in new loans, GE Money Bank reported 16 percent growth and Raiffeisenbank a staggering 114 percent. In May, consumer loans made up 152 billion Kč of the 784 billion Kč in reported household debt.
Provident Financial, a home credit lender, delivers cash loans of 4,000 to 50,000 Kč to customers’ homes within 24 hours of applying. Customers repay the loans during weekly visits from the company’s representatives. Spokesman Ondřej Holoubek said the number of clients in the Czech Republic and Slovakia has been rising steadily to its current 402,000, and the average loan has grown to 12,000 Kč.
“The standard of living in both countries is rising rapidly and loans are affordable for more people,” he said, but added that the company lends money carefully to clients they believe can afford to repay it. “We always check a customer’s ability to repay their loans.”
Whatever a bank or lending company’s requirements for loans, it is ultimately up to the borrower to carefully examine their own finances and contracts to come to the right decision, Kebort said.
SOS stresses financial education to ensure that borrowers fully understand the implications of taking out a loan. Consumers should take time to research the company or bank providing the loan, as well as the contract, as the fine print can often cause borrowers to find themselves in over their heads.
“If they don’t understand something, [consumers should] contact a financial consultant or lawyer. They should never sign a text they don’t understand,” Kebort said. “If they do, they could easily become another victim of loan-sharking. The number of victims is rising fast.”
Based on past trends, the increases in consumer loans will likely hold stable due to the introduction of new products, such as loan consolidations that lower monthly payments and loans catering toward health care and education, Kebort said.
Despite slowdowns in other loans, consumer loans remain the strongest market for growth. “What is interesting,” Kebort added, “is that the number of consumer loans has been increasing disproportionately in comparison with the rest of the loan market.”

Claire Compton can be reached at ccompton@praguepost.com


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