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SBI & IOCL Inked India’s First SOFR linked ECB deal by Replacing LIBOR

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SBI, IOCL ink India's first Libor alternative rate dealOn March 16, 2021, the State Bank of India (SBI) and Indian Oil Corporation Limited (IOCL) inked the first SOFR (Secured Overnight Financing Rate) linked External Commercial Borrowing (ECB) deal by replacing the London Inter-Bank Offered Rate (LIBOR) which is used by world banks when charging each other for short-term loans.

  • The SOFR linked ECB deal is for about $100 million with a maturity of 5 years.

SBI & IOCL Being the Changeover:

  • This deal made by SBI & IOCL is the first SOFR linked ECB deal in India. It will facilitate other firms in India to take this as a reference to make a transition from Libor to Alternate Reference Rates (ARR) linked ECB.

Reason behind the shift from LIBOR to ARRs:

  • In July 2017, Financial Conduct Authority (FCA) in the UK decided to stop LIBOR, the international benchmark reference rate lending by December 2021 and suggested using ARRs
  • Among the 5 currencies under LIBOR, the US dollar will exit by the end-June 2023 and the remaining 4 currencies (Swiss franc, euro, sterling, yen) by the end – December 2021.

LIBOR’s current status: It is still being heavily used one especially for loans that mature within a year.

Alternate Reference Rates (ARRs):

  • Secured Overnight Financing Rate (SOFR) and Sterling Overnight Interbank Average Rate (SONIA) are the two popular alternatives, but only a few swap deals are linked to them internationally.

External Commercial Borrowings (ECB):

  • It is a loan availed by an Indian entity from a non-resident lender with a minimum average maturity.
  • Borrowing limit is about $750 million per financial year
  • Minimum average maturity period is 3 years
  • The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.

Recent Related News:

On February 23, 2021, In 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 the majority of London Inter-Bank Offered Rate (LIBOR) rates are likely to be phased out by the end of 2021.

About Indian Oil Corporation Limited(IOCL)

Establishment -30 June 1959
Headquarters – New Delhi
Chairperson – Shrikant Madhav Vaidya