July 2, 2022
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Central bank plans to change standards for a “smooth” transition

By on August 6, 2021 0

The Reserve Bank of India has decided to change guidelines on foreign currency export credit and restructuring of derivative contracts to ensure a smooth transition to the London Interbank Offered Rate (Libor).

Noting that the move away from Libor is an important event that poses certain challenges for banks and the financial system, RBI Governor Shaktikanta Das said on Friday that the central bank has engaged with banks and market agencies to take action proactively.

“The Reserve Bank has also issued opinions to ensure a smooth transition for regulated entities and financial markets,” he said.

Export credit

Under the amended guidelines, banks will be allowed to extend export credits in foreign currencies using any other widely accepted alternative benchmark rate in the relevant currency. Currently, Authorized Resellers are permitted to provide Foreign Currency Pre-Shipment Credit (PCFC) to exporters to finance the purchase, processing, manufacture or packaging of goods prior to shipment at rates of interest linked to Libor, Euro-Libor and Euribor.

In addition, since the change in the benchmark Libor rate is a “force majeure” event, banks are also advised that the change in the benchmark Libor rate or the benchmarks linked to Libor to a benchmark rate alternative will not be treated as a restructuring.

Under the existing guidelines, for derivative contracts, changing any of the parameters of the original contract is treated as a restructuring. The resulting change in the market value of the contract at the date of the restructuring must be paid in cash.

Previously, on June 8, 2021, the RBI issued a notice encouraging banks and other central bank-regulated entities to stop entering into new contracts using Libor as the benchmark rate and instead adopt an alternative benchmark rate as soon as possible. as possible and in any event before December 31.