MUMBAI : Despite the abandonment of the London Interbank Offered Rate (Libor), several corporate borrowers, especially small Indian firms, are reluctant to adopt alternative benchmarks, fearing changes in borrowing costs and, to some extent, extent, due to a lack of awareness, the bankers mentioned.
âWhile several large companies have recently raised funds using the Secure Overnight Finance Rate (SOFR), an alternative benchmark rate (ARR), smaller clients remain wary. There is a lot of inertia in the treasury services of small business borrowers. We explain the spread changes to them once they move to the new benchmark, and that’s a work in progress, âsaid a senior banker.
The global Libor transition was made necessary after the UK financial authorities decided to phase it out in 2017 after discovering that some major banks had manipulated the benchmark rate up or down by providing fake data. Traditionally, the interest rates of most Indian companies using External Commercial Borrowing (ECB) are compared to the three- or six-month Libor rate.
Indian banks are adding a fallback clause or replacement rates to existing overseas loan agreements to ensure a smooth transition from Libor. While most of the Libor benchmarks ceased to exist after December 31, the others will become inactive after June of next year.
In preparation for the transition, lenders allow systems to capture the alternative SOFR and educate clients on the benefits of the transition. SOFR is a benchmark interest rate published by the New York Fed that banks use to price derivatives and loans denominated in US dollars.
âAt the State Bank of India, we have prepared our systems for ARR, including direct download. We have introduced fallback clauses for ARR in all documents expiring after the deadline. The adoption of ARR in India will accelerate as the deadline approaches after which the published Libor rate may no longer be available, âsaid Ashwini Kumar Tewari, Managing Director (International Banks, Technology and Affiliates) of the State Bank of India.
Libor benchmarks have been calculated as averages of rates polled by major banks and used to value debt instruments and derivatives such as currency swaps and interest rate swaps.
“For the ECBs, the banks are getting very demanding to give borrowers the Libor option because the benchmark has a maturity of 2023 anyway and therefore a three-year loan doesn’t make sense.” , said Ashutosh Khajuria, executive director and chief financial officer. to the Federal Bank, adding that whether the loan contract is for one year or six months, borrowers can technically still use Libor.
While ECB term loans can range from 3 to 7 years, working capital loans are of shorter duration.
Khajuria added that Libor was also used to quote Non-Resident Foreign Currency Deposit Rates (FCNRs), but had been stopped since January 1, and all FCNR deposits are quoted only on SOFR. . These are term deposits by non-resident Indians held in national banks in foreign currencies.
Never miss a story! Stay connected and informed with Mint. Download our app now !!