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 sub-prime 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?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
▶ Answer & Explanation
Correct answer: A. 1 only
Teaser loans, characterized by initial low interest rates that increase later, can indeed lead to defaults when rates rise, mirroring concerns associated with sub-prime lending. This increases the non-performing assets (NPAs) of banks. The second statement is incorrect because such loans are not exclusively, or even primarily, given to inexperienced entrepreneurs for specific sectors; they are more broadly offered to various customer segments for different purposes, often driven by competitive pressures.
Source: UPSC gs1 2011