2011 GS Paper I, all questions

UPSC Prelims 2011 · GS Paper I

Question 80: Economy and Social Development

Why is the offering of "teaser loans" by commercial banks a cause of economic concern ?

  1. 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. 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 ?

a1 only
b2 only
cBoth 1 and 2
dNeither 1 nor 2

AnswerThe answer is (a).

Teaser loans, mostly housing loans, charge a low rate in the first few years and then reset to a much higher market rate. Borrowers may be unable to pay the larger instalments and default, as in the American sub-prime crisis, so they raise concern about the quality of banks' assets. The claim that teaser loans are mostly given to inexperienced entrepreneurs to set up manufacturing or export units is incorrect, as they are largely home loans.

  • 1. Teaser loans resemble sub-prime lending and expose banks to default.
  • 2. They are mostly housing loans, not loans to first-time manufacturing or export entrepreneurs.

How you could have got this

  1. If you were sure statement 1 is correct, (b) and (d) go: each of them leaves 1 out.

    What you needed to know: Teaser loans resemble sub-prime lending and expose banks to default.

  2. Then, if you were sure statement 2 is not correct, (c) goes: it includes 2.

    What you needed to know: They are mostly housing loans, not loans to first-time manufacturing or export entrepreneurs.

Only (a) is left. This one needs every statement.

This follows an unofficial answer: UPSC has not published its key for this year, and if that answer is wrong, so is this path.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Right: teaser loans are an aspect of sub-prime lending with default risk.
  • (b) Statement 2 is incorrect: such loans are mostly for homes.
  • (c) Statement 2 is incorrect, so 'both' fails.
  • (d) Statement 1 is a valid concern, so 'neither' fails.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2011, General Studies Paper I, Series A. The paper on upsc.gov.in.