Amendment of norms for smooth transition from LIBOR

Amendment of norms for smooth transition from LIBOR

Amendment of norms
  • The Regulator RBI, has decided to amend guidelines related to export credit in foreign currency and restructuring of derivative contracts to ensure smooth transition away from the London Interbank Offered Rate (Libor).
  • Noting that the move away from Libor is a significant event that poses certain challenges for banks and the financial system, RBI Governor revealed that the central bank has been engaging with banks and market bodies to proactively take steps.
  • Further it is said that the Regulator also has issued advisories to ensure a smooth transition for regulated entities and financial markets.

Export credit:

  • Under the amended guidelines, banks will be permitted to extend export credit in foreign currency using any other widely accepted Alternative Reference Rate in the currency concerned.
  • At present authorized dealers are permitted to extend Pre-shipment Credit in Foreign Currency (PCFC) to exporters for financing the purchase, processing, manufacturing or packing of goods prior to shipment at LIBOR, Euro-LIBOR, Euribor related rates of interest.
  • Further, since the change in reference rate from Libor is a ‘force majeure’ event, banks are also being advised that change in reference rate from Libor or Libor ­related benchmarks to an Alternative Reference Rate will not be treated as restructuring.
  • Under existing guidelines, for derivative contracts, change in any of the parameters of the original contracted is treated as a restructuring.
  • The resultant change in the mark-­to-­market value of the contract on the date of restructuring is required to be cash settled.
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