Why is the offering of “teaser loans” by commercial banks a cause of economic concern? 1. The teaser loans are considered to be an aspect of subprime lending and banks may be exposed to the risk of defaulters in future. 2. In India, the teaser loans are mostly given to inexperienced entrepreneurs to set up manufacturing or export units. Which of the statements given above is/are correct?

QUESTION

Medium

Economy

Prelims 2011

Why is the offering of “teaser loans” by commercial banks a cause of economic concern?

The teaser loans are considered to be an aspect of subprime lending and banks may be exposed to the risk of defaulters in future.
In India, the teaser loans are mostly given to inexperienced entrepreneurs to set up manufacturing or export units.

Which of the statements given above is/are correct?

Select an option to attempt

Explanation

Teaser loans are loans with low, fixed interest rates offered by banks for a short period, which then switch to higher, floating rates. They are indeed a cause of economic concern. The first statement is correct because teaser loans are considered to be an aspect of subprime lending, which means they are given to borrowers who may have difficulty maintaining the repayment schedule. This exposes banks to the risk of defaulters in the future. However, the second statement is not entirely accurate. While it's true that some inexperienced entrepreneurs might receive teaser loans, they are not the primary recipients of such loans in India.

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