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The Financial Express

Policy to set alternative ref rates at LIBOR transition

| Updated: June 22, 2021 14:13:53


Policy to set alternative ref rates at LIBOR transition

The central bank has issued a policy to set up alternative reference rates at LIBOR transition to facilitate export and import financing, officials said.

"It is expected that from 2022 onward, all new loans and letters of credit (LCs) will be priced differently in addition to carrying out entire outstanding loans and LCs with switching LIBOR to new reference rate," the Bangladesh Bank (BB) said in a notification on Monday.

The Financial Conduct Authority (FCA) of England is reported to end LIBOR after 2021. Declaration of London Inter-bank Offered Rate  (LIBOR) will completely be phased out from July, 2023, it added.

Actually, the LIBOR is a benchmark interest rate at which major global banks lend to one another in the international inter-bank market for short-term loans.

It is based on five currencies including the US dollar, the euro, the Great Britain pound, the Japanese yen, and the Swiss franc, and serves seven different maturities-overnight/spot next, one week, and one, two, three, six, and 12 months.

"We've issued the notification in consultation with stakeholders to implement the policy before phase out of LIBOR," a BB senior official told the FE while replying to a query.

The policy has allowed, besides LIBOR, reference/benchmark rate in the currency of financing with prescribed mark up for discounting/early payment of export bills.

The central bank has focused on short term trade financing for which presently six-month LIBOR + 3.50 per annum can be applied.

In case of risk free benchmark rate, risk premium of 2.50 per cent per annum on the markup rate of 3.50 per cent can be applied, according to the notification.

In the policy, the BB has relaxed six month fixed tenure by allowing flexibility depending on the credit period for financing.

In absence of tenure-linked rate like three-month, six-month, the relative rate may be compounded in advance to calculate effective benchmark rate for the specified tenure against export bill financing, as per the policy.

The central bank has allowed Islamic Shariah-based benchmark rate for Shariah-based finance.

The policy will be applicable for permissible usance import under supplier's/buyer's credit.

In case of import finance, where forward looking benchmark rate with tenure-link is absent, the relative rate applied as benchmark rate for import finance may be compounded in arrears to calculate effective interest for the tenure of credit, the notification noted.

According to the notification, the respective benchmark rate may, in case of necessity for phasing out of LIBOR, be applied during the credit period as per mutual understanding with the concerned lenders.

Besides, authorized dealer (AD) banks shall refrain from arranging LIBOR-tag financing as and when global discourse is published with regards to deadline for its usability, it noted

"The BB's policy will help adopt a new benchmark with LIBOR equivalent," Md Shaheen Iqbal, head of treasury at the privately-owned BRAC Bank Limited, told the FE, while describing the policy.

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