Amendment in benchmark rate due to LIBOR transition for Companies holding External Commercial Borrowings (ECB) and Trade Credits (TC)

The Financial Conduct Authority (FCA), UK announced that LIBOR will either cease to be provided by any administrator or no longer be a representative rate, the current notification of RBI brings much awaited certainty to the borrowers/lenders of foreign currency ECBs/TCs.

• Benchmark rate of FCY ECB/TC –
  • Earlier, benchmark rate in case of FCY(Foreign Currency) denominated ECB/TC refers to 6-months LIBOR rate of different currencies or any other 6-month interbank interest rate applicable to the currency of borrowing It shall now refer to any widely accepted interbank rate or Alternative Reference Rate (ARR) of 6-month tenor, applicable to the currency of borrowing
• AIC (All-in-cost) ceiling for new FCY ECB/TC – To take into account differences in credit risk and term premia between LIBOR and the ARRs, the all in-cost ceiling for new FCY ECBs and TCs has been increased by 50 bps to 500 bps and 300 bps, respectively, over the benchmark rates [100 basis points =1%]
• One Time Adjustment in AIC ceiling for existing FCY ECB/TC – To enable a smooth transition of existing FCY ECBs/ TCs linked to LIBOR whose benchmarks are changed to ARRs, the all-in cost ceiling for such ECBs/ TCs has been revised upwards by 100 basis points to 550 bps and 350 bps, respectively, over the ARR
• There is no change in the all-in cost benchmark and ceiling for INR ECBs/ TCs
• Summary of above-mentioned changes:

Kriti Mehta, Audit Associate, SW India