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?

Teaser loans are characterized by an initial low interest rate that increases significantly after a fixed period [1]. These are considered an aspect of sub-prime lending because they target borrowers who might not qualify for conventional prime mortgages [3]. The economic concern arises because banks face a high risk of default once the "teaser" period ends and interest rates reset to higher levels, especially if the borrower's income has not increased or property values decline. In India, teaser loans were primarily introduced in the home loan segment by commercial banks like SBI to stimulate demand, rather than being specifically targeted at inexperienced entrepreneurs for manufacturing or export units. Loans for micro-entrepreneurs in India are typically categorized under schemes like MUDRA (Shishu, Kishore, Tarun) rather than teaser rate structures [4]. Therefore, only statement 1 is correct.

Sources

1. [1] https://www.brookings.edu/wp-content/uploads/2016/06/11_origins_crisis_baily_litan.pdf
2. [2] https://www.fdic.gov/media/18636
3. [3] https://www.elibrary.imf.org/view/journals/023/0036/012/article-A008-en.pdf
4. [4] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MUDRA Bank > p. 183