Planet & Profit

Main Takeaway:
The London Interbank Offered Rate (LIBOR) was once the world’s pre-eminent benchmark for short-term borrowing costs. Its phase-out by mid-2023 and replacement with robust, transaction-based rates such as SOFR has reshaped global finance—and India’s banks, corporates and regulators have been racing to adapt.

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1. The Rise and Reign of LIBOR

Introduced in the 1980s, LIBOR represented the average rate at which leading global banks lent unsecured funds to one another across seven maturities—from overnight to 12 months—and in five currencies (USD, GBP, EUR, CHF, JPY). At its peak, LIBOR underpinned over $400 trillion in loans, derivatives, bonds and securitisations worldwide, serving as the reference for adjustable-rate mortgages, corporate borrowings and interest-rate swaps.bankofengland

2. The Scandal That Shook Confidence

During the Global Financial Crisis, banks manipulated their LIBOR submissions to bolster profits and signal financial health, triggering a cascade of investigations and fines exceeding $9 billion. That erosion of trust prompted the UK’s Financial Conduct Authority in 2017 to announce LIBOR’s eventual cessation, declaring that key USD tenors would no longer be representative after June 30, 2023.bankofengland

3. Indian Regulators Sound the Alarm

Recognising systemic risks, the Reserve Bank of India (RBI) convened a Financial Benchmarks Committee in 2013 to oversee domestic benchmarks. From August 2020 it issued “Dear CEO” letters urging banks to frame board-approved LIBOR transition plans. On May 12, 2023, the RBI mandated that no new contracts reference USD LIBOR or MIFOR—its homegrown interbank forward rate based on USD LIBOR—from July 1, 2023, and required full migration infrastructure by that date.veritaslegal

4. Enter the Alternative Reference Rates

To replace LIBOR’s judgement-based quotes, global working groups identified robust, transaction-driven benchmarks:

• SOFR (USD): Based on overnight repurchase agreements secured by U.S. Treasuries, offering deep liquidity and transparency.motilaloswal
• SONIA (GBP), €STR (EUR), SARON (CHF), TONAR (JPY): Equivalent overnight rates for other LIBOR currencies.
• MMIFOR (INR): A modified Mumbai Interbank Forward Outright Rate developed by Financial Benchmarks India Ltd., replacing MIFOR in new contracts from January 1, 2022.pwc

5. The Mechanics of Transition

Indian banks and corporates faced a two-pronged challenge:

1. Contract Remediation: Embedding robust fallback clauses to automatically switch existing LIBOR-linked contracts to ARRs plus spread adjustments upon cessation.
2. Systems & Processes: Upgrading treasury, risk-management and accounting systems to handle daily-compounded overnight rates instead of forward-looking term rates, while preserving hedge effectiveness.

State Bank of India spearheaded industry coordination through the Indian Banks’ Association, conducting exposure assessments across loans, derivatives, external commercial borrowings (ECBs) and trade-finance instruments.sbi

6. Exposure in Indian Balance Sheets

By end-2022, estimates suggested Indian banks held over $150 billion of LIBOR-referenced assets and liabilities—ranging from corporate dollar loans to cross-currency swaps. Corporates such as Infosys, Dr. Reddy’s and Reliance Industries had sizable foreign-currency borrowings indexed to USD LIBOR, necessitating renegotiation or conversion to SOFR-linked facilities.

7. Early SOFR Deals in India

Pioneering transactions underscored market readiness:

• HSBC India: Executed India’s first SOFR-linked documentary-credit discounting for Brookfield Renewable’s solar-panel imports in GIFT City.about.hsbc
• ICICI Bank: Closed its inaugural SOFR-linked term loan and cross-currency swap in October 2021, demonstrating product readiness.icicibank
• REC Limited: Raised a USD 75 million five-year SOFR-linked syndicated term loan—the first for any NBFC in India.pib

Despite these milestones, liquidity in SOFR derivatives remained modest compared to LIBOR, posing initial challenges in hedging and pricing.

8. Challenges and Mitigants

• Liquidity Premium: Overnight ARRs lack term-structure liquidity; term-SOFR developed by the CME and LSEG helped bridge the gap.
• Accounting & Tax Implications: Transition triggered hedge-accounting requalification needs and potential tax adjustments—addressed via detailed RBI and ICAI guidance.
• Client Communication: Ensuring borrowers understood how fallback adjustments impacted cash flows was critical to maintaining trust.

9. Impact on Indian Markets

The migration away from LIBOR has yielded enduring benefits:

• Enhanced Resilience: Transaction-based benchmarks reduce manipulation risk and improve market integrity.
• Operational Readiness: Indian banks modernised treasury and risk systems, bolstering their capacity for real-time rate analytics.
• Global Alignment: Adopting SOFR and MMIFOR has seamlessly integrated Indian market participants into global funding and hedging practices.

10. The Road Ahead

Although LIBOR has ceased, legacy contracts will continue to unwind via synthetic rates until mid-2024. Indian regulators and market participants must now:

• Complete remediation of remaining legacy exposures.
• Deepen liquidity in ARR-linked instruments through market-making incentives.
• Leverage enhanced benchmark integrity to develop new credit and hedging products.

For India’s financial ecosystem, the LIBOR transition marks a watershed: a decade-long prudential exercise that has fortified market infrastructure, aligned domestic practice with global norms, and paved the way for more transparent, resilient benchmarks in the digital age.

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