Czech Republic: Stricter conditions for non-bank lenders are clearing the market of fraud

The Most regional edition of Deník.cz reports that a stricter law on consumer lending intended to combat illegal loans and usury has been in effect in the Czech Republic for a year and a half now. According to a survey by the Czech Banking Association (ČBA) in February, more than half of people seeking credit turn to companies that are not banks for loans, most frequently borrowing to purchase electronic equipment and other general household appliances.

"The change in the law has significantly cleared the market of fraudsters. That does not mean, however, that the loan sharks have disappeared, just that they are now absolutely illegal, so it is necessary to pay heightened attention to them, including on the Internet," Zdeněk Soudný from the "Safe Loan Navigation" service (Navigátor bezpečného úvěru) told Deník.cz.

Banks provided consumer loans last year worth CZK 200 billion [EUR 8 billion]. Another CZK 65 billion [EUR 2.5 billion] was loaned by firms that are not banks.

The volume of money that is loaned illegally is estimated by Soudný at CZK 10 billion [EUR 400 million]. Loan sharks primarily target people rejected by other lending institutions, and the untrustworthy companies frequently never even verify a borrower's ability to pay off the loan, providing money to unemployed persons or to those who have no income at all and who will have a difficult time making payments.

This lending intensifies the borrowers' indebtedness and the spiral of "squeezing" out one loan to cover another. Soudný advises that consumers should borrow money exclusively from entities officially licensed by the Czech National Bank or should follow the news from his Safe Loan Navigation service or People in Need's "Index of Responsible Credit" (Index odpovědného úvěrování) service.

Stricter conditions for lenders

On average, according to the ČBA survey, people in the Czech Republic carry loans of CZK 45 000 [EUR 1 775] and one-third of clients seek to borrow amounts of about CZK 100 000 [EUR 4 000]. Just 44 % of borrowers go to banks for financing, though, while the rest of those seeking credit in the Czech Republic borrow from non-bank companies or directly from retailers.

In less than two months a fundamental change awaits most borrowers in the country. On the basis of the new law on consumer loans, which took effect a year and a half ago, firms providing credit must be licensed.

The Czech National Bank (ČNB) is seeking proof that lenders who are not banks hold CZK 20 million [EUR 800 000] in founding capital, that they document where that money came from, and that the firms be subjected to strict creditworthiness tests. Two years ago there were 57 000 entitles registered in the Czech Republic as lenders, Deník.cz reports.

The deadline for all lenders to meet all the requirements is the end of May, and it is likely that just a fraction of them will fulfill the stricter conditions. At this moment, Deník.cz reports, just 27 entities, including ČSOB Leasing, Home Credit and ŠkoFIN, have been granted licenses.