After allegations of manipulation and collusion by big global banks, the end of Libor began in 2017, with 2023 decided as the last year in the transition road. By end-2021 many banks had stopped drawing contracts using Libor and June 2023 was set as the deadline for replacing the guiding rate.
While multiple alternative rates have been proposed, it is feared that the transition would not be smooth where there are disputes between borrowers and lenders, particularly in matters where the loan terms may have to be rejigged and borrowers may not be cooperative.
The banking regulator has asked the industry body Indian Banks’ Association (IBA) to explore ways to suggest possible rules for migration from Libor, two people familiar with the matter told ET.
“A difficult borrower and its legal team can always argue that the loan documentation does not provide for switchover to another rate. Even the courts cannot apply it retrospectively. So this is an issue that has to be sorted out,” said a bank CEO.
Loans that require restructuring and changes in the tenure, moratorium and other conditions, the shift from an unsecured rate (like Libor) to one of the secured alternative rates that have been proposed could cause disagreement between a borrower and lender.
“Libor-linked contracts, whether it is a derivative, loan or borrowing, may have implications around interest computation, late payment charges when transitioning from Libor to SOFR or SONIA, since it is a departure in computation from unsecured to secured basis leading to ‘basis risk’. This may have an impact on pricing, which can lead to disputes on a later date unless addressed appropriately. Additionally, contractual fallback provisions need to be amended for Libor cessation, as non-clarity can lead to disputes,” said Rajosik Banerjee, partner and head, financial risk management, KPMG.
SOFR (Secured Overnight Funding Rate) and SONIA (Sterling Overnight Interbank Average Rate) are among the alternatives proposed to replace Libor.
While Libor is calculated on the basis of inputs from the global banks on how much they would charge for short-term loans, SOFR is the cost of borrowing against US treasury bills in the market for repo (or repurchase) deals.
Besides external commercial borrowings from offshore lenders, local corporates can take foreign currency loans from foreign branches of Indian banks, international banking units in International Financial Services Centre in GIFT City, as well as from domestic branches which can extend credit facilities from their dollar lines and out of foreign currency deposits.