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 subprime lending and banks may be exposed to the risk of defaulters in future.
- 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 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Explanation
Statement 1 is correct
- Teaser loans offer low initial interest rates that increase after a fixed period. This can lure borrowers who may later struggle to repay at higher rates, raising the risk of loan defaults — a concern similar to subprime lending seen in the 2008 global financial crisis.
Statement 2 is incorrect
- Teaser loans in India have primarily been offered in the housing loan segment, not predominantly to entrepreneurs or for manufacturing/export activities. While such teaser products are not banned by the regulator, the standard asset provisioning requirement is higher for such loans. For normal home loans, the standard asset provisioning is 0.4% but for teaser loans it is 2%.
