Banks in India ready for transition, but the world still loves Libor

Libor era ends this year, and banks across the globe will have to shift to an alternative rate. Two popular choices available only have a few swap deals linked to them

Banks in India are ready to delink their foreign-exchange loans from London Interbank Offered Rate (Libor) to an alternative reference rate, but the international markets are still happily continuing with the old benchmark. 

The Libor era comes to an end in 2021, and banks across the globe will have to shift to an alternative rate. Secured Overnight Financing Rate (SOFR) and Sterling Overnight Interbank Average Rate (SONIA) are the two popular alternatives, but internationally, only a few swap deals are linked to them.  

There are three kinds of lending that are referenced to such international benchmarks. One is the line of credits etc., another is raising dollar loans for working capital, and another is long term external commercial borrowings (ECB) linked to Libor. The short-term loans are not the issue here, but the long-term loans are a problem area for both the banks and the borrower. There has been no agreement as such on how ECBs will be valued with a new benchmark.  

 

And this is not the fault of Indian banks as such. In international markets, Libor is still widely used and even new loans are getting priced at Libor. Indian banks are facilitating ECBs linked to Libor too, with an understanding that whenever the benchmark changes, the loans will automatically move to the new benchmark, said a senior State Bank of India (SBI) official.  

Then there are derivatives that are always Libor linked. The International Swaps and Derivatives Association (ISDA) have already devised comprehensive guidelines on this issue linking derivatives to SOFIA. But the world has not yet moved to it. Most derivatives contracts are drawn based on ISDA documentations.  

“ISDA has given two options. Either you agree to our guidelines and methodology, and move onto the new reference rate right away. Or you wait for others. Once 80 per cent of the contracts are made agreeing to new methodologies of ISDA, automatically the world moves on beyond Libor. But that has not happened yet,” explained Samir Lodha, managing director at QuantArt Market Solutions.  

Bankers in India say they have very little to do with the situation, and most of the rules will have to come from international quarters. Whatever is decided, the transition would be smooth and without any glitch whatsoever.  

The local leading the exercise is Indian Banks’ Association and the Reserve Bank of India. The IBA has constituted two workstreams to examine the transition management and rates methodology for Mumbai Interbank Forward Offer Rate (MIFOR) to coordinate on the industry efforts to transition.  

Rajkiran Rai G, managing director and chief executive of Union Bank of India said banks are working to transit to a post-Libor regime well before December 2021. They are yet to make the choice of the new benchmark though. “Banks have been working in system changes for a while so transition is expected to be smooth,” Rai said. 

 

ICICI Bank has an internal Libor Working Group that oversees the transition process. The Bank has identified its exposures across various contracts, both cash and derivatives and is proactively making the necessary documentary and system changes to transition to the new ARR regime, according to B. Prasanna, group executive and head of global markets at ICICI Bank.  

“The bank has conducted webinars to bring about the awareness and implications of this transition for its clients, adhered to the interbank offered rates protocol of ISDA to transition derivative contracts smoothly, dealing in ARR contracts like the money market transaction earlier this week and actively participating in various industry forum webinars,” Prasanna said. 

But the consensus on the issue would likely emerge in a few months.  

“In the derivatives market, broadly. In the loan market, however, both acceptance of new benchmark and transition methodology are yet to be agreed. Discussions are on and consensus should emerge during the year,” Lodha said.