The liquidity overhang in the system coupled with the past downward movement of interest rates seems to have spurred a sense of complacency oblivious of the downside risks of an adverse interest rate movement. It is also apprehended that this attitude has led some banks to dilute their approach to credit risk.
The building of the risk elements into the pricing of the credit facilities is reportedly taking a backseat in the pursuit of asset expansion. This may leave banks in a situation where some of the players are not only less prepared to face the reversal of interest rate movement, but are also left with a badly priced portfolio in relation to the credit quality.