RBI Deadline for Transitioning to Alternative Reference Rate
The Reserve Bank of India (RBI) has recently issued a directive to banks and financial institutions, urging them to adopt an Alternative Reference Rate by July 1. This transition comes as part of a global effort to move away from the scandal-ridden London Interbank Offered Rate (LIBOR) and Mumbai Interbank Forward Outright Rate (MIFOR).
The Role of LIBOR in the 2008 Financial Crisis
LIBOR, which was used as a benchmark rate for raising funds abroad by banks and private companies, played a detrimental role in exacerbating the 2008 Financial Crisis. It played a major role in setting interest rates for adjustable-rate loans, mortgages, and corporate debt. The subsequent revelations of manipulation and scandals involving rate-setting banks underscored the need for a more reliable and transparent benchmark rate.
Introducing the Recommended Alternative Reference Rate
The RBI has recommended the adoption of the Secured Overnight Financing Rate (SOFR) as a widely accepted Alternative Reference Rate. SOFR is considered more accurate and secure, providing a robust pricing benchmark for financial transactions. Alongside SOFR, the Modified Mumbai Interbank Forward Outright Rate (MMIFOR) is also being predominantly used for new transactions.
Transition Timeline and Expectations
By July 1, all financial institutions and banks will have established the required systems and procedures to fully transition away from LIBOR. This timeline aims to facilitate a smooth shift away from LIBOR and towards the adoption of alternative reference rates.
Role of the Indian Banks’ Association
The Indian Banks’ Association, an industry association, has been actively involved in achieving a seamless transition from LIBOR. Through concerted efforts and collaboration, the association has played a significant role in ensuring a smooth shift and minimizing disruptions in the financial sector.
Phasing Out of LIBOR and MIFOR
After June 30, the publication of the remaining five Dollar LIBOR settings will cease permanently. While certain synthetic settings will continue to be published until June 30, 2023, the Financial Conduct Authority in the UK has made it clear that these settings should not be used in new financial contracts. Additionally, the MIFOR, a domestic interest rate benchmark tied to Dollar LIBOR, will no longer be published by Financial Benchmarks India Pvt Ltd after June 30.
Month: Current Affairs - May, 2023
Category: Economy & Banking Current Affairs