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?

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 … Which of the statements given above is/are correct? — UPSC Prelims 2011 Answer & Explanation

Economy2011

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
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?

Explanation

The correct option is 1 only because teaser loans typically offer low initial interest rates that can lead to significant payment increases after the introductory period, exposing banks to higher risks of default, particularly among borrowers with lower creditworthiness, thereby contributing to subprime lending issues. Statement 2 is not universally correct, as teaser loans can be marketed to a broad audience, and the concern stems more from their potential to foster unsustainable borrowing than from the profile of the borrowers. This understanding aligns with economic principles regarding credit risk and financial stability, which is crucial for examinations like the UPSC Prelims.

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