Money & Banking

Will the end of LIBOR in 2021 have an impact on domestic banks, companies?

SurabhiMumbai, October 15 Mumbai | Updated on October 15, 2019 Published on October 15, 2019

IBA sets up working group to study transition andassess impact

Banks have begun to assess the impact the end of London Interbank Offered Rate (LIBOR) in 2021 will have on their operations, and are also working out transition plans.

The Indian Banks’ Association (IBA) has set up a working group to assess the impact of LIBOR.

“It is essential that banks are prepared to study the impact, the alternatives to LIBOR, the issues that will be facing banks and corporates, accounting issues, and how to 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 banks that may not be fully familiar as to what is to be expected and how to educate the customers.

The working group is understood to include private, foreign and public sector banks, as well as experts.

Two sub-committees have been set up to study the rates and methodology and the transition, said another member of the committee. An assessment in terms of the exact exposure of domestic banks and companies to LIBOR is difficult in monetary terms. But companies and banks may require to review their accounting, tax, and IT and legal provisions for the transition.

The move 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.

Impact on MIFOR

As of now, the Reserve Bank of India 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 MIFOR, or the Mumbai Interbank Forward Offer Rate, which is derived partly from the LIBOR, the central bank 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 the end of LIBOR will not impact retail loans in India. Butit will an impact on overseas corporate and syndicated loans, trading and derivatives activities that continue beyond 2021.

“These impacted portfolios need to have a transition plan to new rates and require fall back options for new contracts. For trading and derivative, the new ISDA agreement expected by the beginning of 2020, will assist to a great extent; however, foreign currency loans that are bilateral in nature require 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 that depend on overseas borrowings, such as oil and gas, infrastructure, housing finance and capital intensive industries, as well as those with long-term hedging such as IT, will be impacted with the end of LIBOR.

Published on October 15, 2019
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