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?

The correct answer is A) 1 only. Statement 1 is correct and statement 2 is not.

Statement 1 is correct. A teaser loan offers a low initial interest rate or EMI for the first year or two, after which the rate resets to a higher level. This structure lends to borrowers whose repayment capacity may not hold once the rate rises. That is why it is treated as a form of sub-prime lending, and banks face the risk of defaults later. The 2008 US sub-prime crisis showed how such loans can damage the whole financial system.

Statement 2 is wrong. In India, teaser loans were mainly offered to retail borrowers, chiefly for home and car loans, not to inexperienced entrepreneurs setting up factories or export units. Business credit to new units follows a different route, through project appraisal and MSME lending norms.

Syllabus link: This sits under banking reforms and financial sector stability in Indian Economy. For Mains, it links to household debt, credit quality and the RBI's prudential norms.

Trap: Aspirants see 'loans to new ventures' in statement 2 and assume it is true. Remember that teaser loans are a retail product, not an entrepreneurial one.