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Hundreds of thousands of Czechs facing distraint

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An increasing number of Czechs are starting to pay for their huge spending.

“The increase is huge – between one-third and one-half over the past two years,” said Vladimír Polák, a judge in Nový Jičín. Lawsuits involving unpaid consumer loans account for more than 50% of administrative work of the local court’s commercial department, he added.

Some of his colleagues fear the situation will get even worse as a result of the current financial crisis. “People are becoming insolvent now, but first there is always an effort to resolve the problem through an out-of-court settlement. We expect the biggest load of lawsuits to come in two to three months, that is, in January and February,” said Filip Havrda, a judge in Plzeň.

But an increasing number of disputes does not get to courts at all because many hire-purchase companies include an arbitration clause in contracts with clients. That means that it would not be a court to deal with a possible dispute, but an arbitrator set by the company. “Court proceedings can take a few years, while a decision in arbitration proceedings is usually issued within 50 days,” said Milan Káňa, spokesman for retail loans provider Profi Credit. “Disputes solved within arbitration proceedings prevail at present,” Olga Mužíková of Home Credit said.

The number of distraints is therefore the best indicator of household debts. Courts ordered 270,000 distraints in 2005, over 309,000 distraints a year later, and almost 428,000 distraints in 2007. This year the figure will be considerably above half a million.

“Just in the first half of the year, courts ordered 302,000 distraints,” said Pavel Kočiš, spokesman for the Czech distrainers chamber EKČR.

Unsettled consumer loans were the most frequent reason behind distraints last year. The trend has continued this year.

“The payment discipline of households is getting worse and worse. In the early 1990s, distraints ordered due to debts hovered around four hundred cases a year. Last year, their number exceeded four thousand, and that does not include private distraints,” said Jiřina Kantůrková, chairwoman of the District Court in Kolín.

We do not fear crisis

The financial crisis that broke out in September apparently did not frighten people in the Czech Republic. “The volume of consumer loans that we provided increased by 21% in October,” said Markéta Dvořáčková of GE Money Bank, which owns the leader on the Czech hire-purchase market, Multiservis. Its competitor Home Credit has recorded a higher number of consumer loans as well.

Česká spořitelna chief economist Pavel Kysilka said it was too early to frighten Czechs by the impacts of the financial crisis. It will all depend mainly on what would be the overall impact of the global crisis on the Czech economy.

“Of course, if unemployment increases significantly or if real wages decrease and if consumers become cautious, then it can have an effect,” Kysilka said. Such a situation would then impact the quality of all types of loans, not just consumer loans, he added.

More and more debts

The higher number of unpaid loans is not that alarming, said Kysilka.

“The loan portfolio is maturing and ageing. And the older the loans are, the more risky they are, of course,” he said, pointing out that the huge rise in consumer loans provided is a matter of recent years and that household debts in the Czech Republic are still far below the level recorded in western countries.

Loans provided to Czech households account for less than a quarter of the country’s gross domestic product, while the eurozone average is 60%.

Czech household debt, however, has been growing: At the end of 2006 the volume of consumer loans reached CZK 91 billion, and last year people owed CZK 115 billion. At the end of September, the volume of consumer loans provided to households was as high as CZK 136 billion.

Translated with permission by the Prague Daily Monitor.

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