SBI and IOCL to ink India’s First Libor Alternative Rate Deal

Highlights:

  • The State Bank of India (SBI) and Indian Oil Corporation Limited (IOCL) will be sign the first Secured Overnight Financing Rate (SOFR) linked external commercial borrowing (ECB) deal. 
  • The deal will be signed because the de facto international benchmark reference rate called the London Interbank Offered Rate (LIBOR) will no longer work as the benchmark after December 2021.
  • The state Bank of India highlighted that, it will be arranging $100 million linked to SOFR for 5 years. 
  • The LIBOR will no longer work as the benchmark after December 2021. 
  • Thus, the Secured Overnight Financing Rate (SOFR) and Sterling Overnight Interbank Average Rate (SONIA) are the most potential alternatives. 
  • But only a few swap deals are linked to these alternatives at the international level. 
  • Libor is still used extensively specially for loans which are getting matured within the year.
What is LIBOR ?
  • LIBOR is an interest-rate average which is calculated with the help of the estimates which is submitted by leading banks in London. 
  • Under it, each bank estimates what it would be charged to borrow from other banks. 
  • The rate was formerly known as British Bankers’ Association Libor (BBA LIBOR) before the responsibility of the administration was transferred to Intercontinental Exchange. 
  • It is a primary benchmark for the short-term interest rate across the world, along with the Euribor. 
  • However, this interest rate average will not be published any after December 2021 and the market participants are being encouraged to transition towards other risk-free rates. 
  • These rates are calculated on five currencies and seven borrowing periods which ranges from overnight to one year. 
  • The rates are published each business day by the Thomson Reuters.