DBS Bank India announced the first active transition of an existing loan and derivative to new benchmarks.
DBS successfully transitioned some of the existing loan and derivative contracts with two companies – Power Finance Corporation Ltd and REC Limited – to the new benchmark rates. Existing contracts were compared to the exchange offer rate (SOR) [a legacy SGD floating benchmarked IBOR], and after this transition, all loans and derivatives have now moved to the Singapore Overnight Rate Average (SORA), the new risk-free rate.
Ashhish Vaidya, Managing Director and Head of Markets, DBS Bank India, said: “Firms with floating benchmark foreign currency loans, especially those with interest rate or cross currency hedges built around floating rate borrowing, are concerned that the benchmark transition could lead to additional costs. Indeed, the market for loans and derivatives will evolve independently of each other.
We have anticipated this customer requirement and have organized a first industry solution that meets it. We believe that the active transition has allowed us to demonstrate our ability to adapt to the change of benchmark, thus strengthening clients’ confidence in our benchmarks. We are now ready to facilitate seamless transitions for other clients who wish to embark on this adventure. “
Sanjay Malhotra, President and CEO, REC, said: “We are delighted to be a part of the active transition opportunity offered by DBS Bank for their SGD loans, which allowed us to remove the uncertainty around the IBOR transition for the loan concerned. The experience gained through the transition process will also help REC in other LIBOR-linked term loans.
As the old SOR benchmark interest rates and the Singapore Interbank Offered Rate (SIBOR) are being routinely phased out, SORA is the recommended SGD benchmark interest rate benchmark that should replace them. Banks in all countries, including India, are also moving towards ARR benchmarks equivalent to SORA.
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In July 2021, RBI issued a notice to banks and financial institutions advising them to stop entering into new financial contracts that refer to the London Interbank Offered Rate (LIBOR). Since the notice, banks in India have executed transactions linked to the benchmark Guaranteed Overnight Funding Rate (SOFR) index. The DBS derivative agreement is the first SEO SORA in India.
Total External Commercial Borrowing (ECB) raised by Indian companies in 2020 and 2019 was $ 39 billion and $ 52 billion, respectively. Typically, ECBs are issued for longer durations and linked to floating rate benchmarks such as LIBOR. It is expected that much of the above capital raising will be affected due to the transition.