Correct Option
Statement 1 is correct. Teaser loans are characterised by initially low, fixed interest rates for a short period, followed by significantly higher, often variable, rates for the remainder of the loan term. This structure can lead to borrowers facing payment difficulties or defaults once the interest rates reset to higher levels, especially if their repayment capacity was assessed primarily on the initial low rates. Such lending practices, where the risk of default is elevated due to the borrower's potential inability to service higher future payments, share characteristics with sub-prime lending. This exposes commercial banks to increased credit risk and potential non-performing assets, posing a concern for financial stability.
Incorrect Options
Statement 2 is incorrect. In India, teaser loans were primarily offered for housing loans, not predominantly to inexperienced entrepreneurs for setting up manufacturing or export units. The concerns surrounding teaser loans in the Indian context largely revolved around the housing finance sector and the potential for a build-up of risk within this segment.
Options (b) and (c) are incorrect because Statement 2 is factually inaccurate. Option (d) is incorrect as Statement 1 correctly identifies a significant economic concern associated with teaser loans.