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NBFCs need to plan for Libor transition: Report

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Mumbai, Feb 22 (PTI) Ten large non-bank lenders have borrowings of USD 13 billion linked to the soon to be ceased Libor rate and need to plan for a smooth transition to a newer regime, a report said on Monday.

'There is an estimated overseas foreign currency borrowings of USD 13 billion and notional derivative exposure covering forward rate agreements, interest rate swaps and cross currency swaps to the tune of USD 18 billion across the top 10 NBFCs,' EY, a consultancy firm, said in a statement.

Libor or the London Interbank Offered Rate (Libor) is set to cease by end of 2021 and the RBI has also been asking the system to prepare for the change.

The consultancy said it is imperative for NBFCs to understand what it means to link their forex borrowings and derivative transactions to Secured Overnight Financing Rate (SOFR), Sterling Overnight Interbank Average Rate (SONIA) or other comparable risk free benchmark interest rates.

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, it said, adding that this may now be linked with SOFR, the Alternative Reference Rates (ARR) used for US dollar denominated derivatives and loans.

NBFCs cannot remain detached from this transition as it is equally important for them to 'inventorize' their LIBOR linked borrowings and derivative exposures and develop a proactive road map to assess impact on their financial statements, bottom line and their ability to raise overseas borrowings at a competitive rate, it said.

'This is an opportune time for NBFCs to develop LIBOR transition plans and proactively communicate with regulators, investors, lenders, customers and other counterparties,' its partner Sandip Khetan said. PTI AA BEN MKJ