Banks have begun work to assess the impact to the end of the London Interbank Offered Rate (LIBOR) after 2021 on their own operations as well as work out transition plans. The Indian Banks’ Association has set up a working group to assess the impact of LIBOR.
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“It is essential that all the banks are prepared to study the impact, what are the alternatives to the LIBOR, what are the issues which will be facing the banks, corporates, accounting issues, etc and how do we take it forward. IBA has formed a working group,” said VG Kannan, Chief Executive IBA.
The findings of the group will be used to educate the various banks some whom may not be fully familiar as to what is expected and how to educate the customers also. The working group is understood to include private, foreign and public sector banks.
Two sub-committees have been set up to study the rates and methodology and the transition, said another member of the committee. The move to study the impact of the end of LIBOR is in sync with global trends where a number of countries have already started preparations for their financial institutes and banks on how to transition from LIBOR.
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As of now, the Reserve Bank of India (RBI) is not expected to step in on the issue, as it is not concerned with the borrowing rates of LIBOR. But, if it has some impact on the MIFOR or the Mumbai Interbank Forward Offer Rate, which is derived partly from the LIBOR, the RBI could potentially issue some guidelines, according to analysts.
Globally, LIBOR is a global benchmark rate used by banks for short term interest rates and is based on a poll of quotes submitted by banks. Experts say that in India, end of LIBOR will not impact retail loans. However, transition from LIBOR will impact overseas corporate and syndicated loans, trading and derivatives activities that continue beyond 2021.
Read more:What is LIBOR and how does it work?
“These impacted portfolios need to have a transition plan to new rates and require fall back options for new contracts. For trading and derivative new ISDA Agreement expected by the beginning of 2020 will assist to a great extent, however, for foreign currency loans, which are bilateral in nature requires negotiations between two parties,” said Kuntal Sur, Partner, Financial Risk and Regulation Leader, PwC, adding that leading banks need to work with their top corporate clients and help them in their journey of transition.
Sectors which depend on overseas borrowings such as oil and gas, infrastructure, housing finance and capital intensive industries as well as those with long term hedging like IT will be impacted with the end of LIBOR.
However, an assessment in terms of the exact exposure of domestic banks and companies to LIBOR is difficult in monetary terms.