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?
Answer & explanation
Answer: (a) 1 only
A teaser loan charges a low interest rate for the first few years and then resets to a higher rate. Borrowers may not be able to pay the higher instalments, so banks face default risk, a hallmark of subprime-type lending. In India, teaser rates were a feature of housing loans, not loans to new entrepreneurs for factories or exports. Only statement 1 is correct.
- ✓ 1. The RBI flagged that some borrowers may struggle to service the loan once the higher normal rate applies. It also noted that many banks did not assess repayment capacity at that normal rate. This is subprime-type lending and exposes banks to future defaults. The RBI raised standard-asset provisioning on such loans to 2 per cent.
- ✗ 2. The RBI's discussion of teaser rates in India concerns housing loans sanctioned at a low initial rate. Nothing links them to inexperienced entrepreneurs setting up manufacturing or export units.
Remember · Teaser loan means a low initial interest rate that is later reset higher. In India it meant housing loans. The risk is default after the reset, so the RBI raised provisioning on them to 2 per cent (Nov 2010).
Sources
- RBI – Second Quarter Review of Monetary Policy 2010-11 (Statement), Teaser Rates for Housing Loans ↗ “This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. … It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates.”
Question: UPSC Civil Services (Preliminary) 2012, General Studies Paper I. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·
