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

  1. 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. 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?

  1. A.1 only
  2. B.2 only
  3. C.Both 1 and 2
  4. 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

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