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NBFCs in India need to plan for effective IBOR transition: EY India

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NBFCs in India need to plan for effective IBOR transitionIn accordance with the new EY (Ernst & Young) India report titled “Impact of IBOR transition on NBFCs in India”, Indian Non-Banking Finance Companies (NBFCs) require an effective plan for Inter Bank Offered Rate (IBOR) transition, as majority of London Inter Bank Offered Rate (LIBOR) rates are likely to be phased out by the end of 2021.

What is LIBOR?

It is one of the most common series of benchmark rates for determining short-term interest rates across the world which are measured in trillions of dollars across global currencies.

  • Simply, it indicates the average rate at which large banks in London can borrow unsecured short term loans from other banks.
  • About $350 trillion worth of contracts across the globe are pegged to LIBOR, which is the key interest rate benchmark for several major currencies.

Key Points:

–The key challenges that will need to be addressed by NBFCs, banks and other institutions are contract amendments, financial reporting, tax and other risks due to cessation of LIBOR rates after 2021.

–NBFCs should inventorise their LIBOR-linked borrowings to develop a roadmap to assess the impact on their financial statements, bottom line and their ability to raise overseas borrowings at a competitive rate.

–NBFCs can transit to Alternative Reference Rates (ARR), also known as Risk free rates (RFR).

–Incidentally, the Mumbai Interbank Forward Offer Rate (MIFOR), widely used by banks in India for setting prices on forward rate agreement and derivatives, has USD LIBOR as its core component. This may now be linked with Secured Overnight financing rate (SOFR), the ARR used for US dollar denominated derivatives and loans.

–There is an estimated overseas foreign currency borrowings of $13 billion and notional derivative exposure covering forward rate agreements, interest rate swaps and cross currency swaps to the tune of $18 billion across the top 10 NBFCs.

Recent Related News:

i.According to the ‘International Migration 2020-Highlights’ report released by the United Nations Department of Economic and Social Affairs (UN DESA), In 2020, 18 Million persons from India were living outside of their country of birth thus making it the World’s Largest Transnational Community.

ii.The International Labour Organization (ILO) in its report titled ‘Working from home from invisibility to decent work’ has highlighted the need to adopt Global Labour Standards and improve national-level labour registries for home-based workers (Industrial home-based workers, Teleworkers, Digital Platform workers) & organisations.

About EY India:

Chair– Rajiv Memani
Headquarter– New Delhi