UPSC Prelims 2011 Q80: Indian Economy – Banking & Financial Sector
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?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (a) 1 only
Explanation
Why "teaser loans" raised economic concern
Teaser loans offer low initial interest rates that rise later, often linked to housing finance.
| Statement | Verdict | Reason |
|---|---|---|
| 1. Teaser loans are a sub-prime-lending-like risk, exposing banks to future defaults | Correct | As rates reset higher after the initial teaser period, borrowers may struggle to repay, raising default risk for banks — similar to the dynamics behind the US sub-prime crisis |
| 2. In India, mostly given to inexperienced entrepreneurs for manufacturing/export units | Incorrect | In India, teaser loans were primarily associated with retail housing loans, not lending to entrepreneurs for manufacturing or export ventures |
Teaser loans and risk:
| Point | Detail |
|---|---|
| Mechanism | Low initial rate, rising later |
| Risk | Borrowers may default once rates reset higher |
| India context | Mainly a housing loan product, not an entrepreneur-financing tool |
Answer: (a) 1 only.
Why each option is right or wrong
- (a) CORRECT. Teaser loans carry a sub-prime-like default risk once the initial low-rate period ends and rates reset higher.
- (b) Incorrect. Teaser loans in India were mainly a housing finance product, not aimed at entrepreneurs for manufacturing/export units.
- (c) Incorrect. Statement 2's entrepreneur/manufacturing claim is false, so 'both' cannot be correct.
- (d) Incorrect. Statement 1's default-risk concern is accurate, so 'neither' is wrong.
Key point
Teaser loans are a concern because they resemble sub-prime lending risk (low initial rate, higher reset rate, possible defaults) — in India, they were mainly a HOUSING loan product, not entrepreneur financing.
Remember
Teaser loans: sub-prime-like default risk from rate resets; in India, a housing-loan issue, not entrepreneur/manufacturing financing.
Common mistakes
- Confusing the housing-loan context of Indian teaser loans with business/entrepreneur financing.
- Missing the sub-prime-crisis parallel that makes teaser loans a systemic risk concern.
- Not recognising the rate-reset mechanism as the actual default-risk driver.
Exam tip
Teaser loans = low initial rate, rate resets higher later → default risk, like the sub-prime crisis trigger. In India, this was a HOUSING loan issue, not an entrepreneur-financing one.
Sources
- Encyclopaedia Britannica — subprime mortgage crisis
- Ministry of Finance, Government of India — Economic Survey 2010–11 (financial intermediation)