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The Reserve Bank of India (RBI) has asked banks and financial institutions to adopt by July 1 a widely accepted Alternative Reference Rate, such as the Secured Overnight Financing Rate (SOFR), to complete the transition from the scandal-hit London Interbank Offered Rate (LIBOR) and Mumbai Interbank Forward Outright Rate (MIFOR).
Banks and private companies were using LIBOR as the benchmark rate for raising funds abroad. It was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages and corporate debt.
New transactions are now predominantly undertaken using SOFR and the Modified Mumbai Interbank Forward Outright Rate (MMIFOR), the central bank said. SOFR is considered a more accurate and more secure pricing benchmark.
According to the RBI, banks and financial institutions are expected to have developed the systems and processes to manage the complete transition from July 1.
The one-month LIBOR was 5.10743 as on May 11.
LIBOR is being phased out because of the role it played in worsening the 2008 Financial Crisis, as well as scandals involving LIBOR manipulation among rate-setting banks. In 2012, investigations into the way LIBOR was set uncovered a widespread, long-lasting scheme among multiple banks to manipulate rates for profit.
“With the concerted efforts of banks and financial institutions as well as industry associations such as the Indian Banks’ Association, a smooth transition with respect to LIBOR settings that have ceased to be published/become non-representative after December 31, 2021 has been achieved,” the RBI said. “The transition away from LIBOR was also facilitated by the continuing publication of US$ LIBOR settings in five tenors which provided a longer transition period particularly for the insertion of the fallback clauses in legacy financial contracts that reference LIBOR,” it said.
At the same time, there have been instances of a few Dollar LIBOR linked financial contracts undertaken/facilitated by banks and FIs after January 1, 2022. “Also, while banks have reported that substantial progress has been made towards insertion of fallback clauses, the process is yet to be completed for all contracts where such fallbacks are required to be inserted,” the RBI said.
After June 30, the publication of the remaining five Dollar LIBOR settings will cease permanently. While certain synthetic settings will continue to be published after June 30, 2023, the Financial Conduct Authority, UK, which regulates the LIBOR, has made it clear that these settings are not meant to be used in new financial contracts. The MIFOR, a domestic interest rate benchmark reliant on Dollar LIBOR, will also cease to be published by Financial Benchmarks India Pvt Ltd after June 30.
