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

Statement 1 is Correct: Teaser loans offer low fixed interest rates for an initial period which later reset to higher floating rates. They are considered an aspect of subprime lending because they can attract borrowers who may struggle with repayments once the rates rise, thereby exposing banks to potential defaults and systemic risk.

Statement 2 is Incorrect: In India, teaser loans were primarily popularized in the home loan/housing sector (notably by State Bank of India in 2009-2010) to stimulate demand. They were not specifically targeted at inexperienced entrepreneurs or the manufacturing and export sectors.

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