To set up alternative reference rates at LIBOR transition to facilitate export and import financing, the Bangladesh Bank (BB) has issued a policy for short-term commercial financing.
The directive was issued on the application of alternative index rates for short-term commercial financing after the withdrawal of the London Interbank Offered Rate (LIBOR) rate from the international market system.
However, 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, said the central bank in a notification on Monday.
The Financial Conduct Authority (FCA) of England is reported to end LIBOR after 2021. Declaration of LIBOR will completely be phased out from July, 2023, it added.
Actually, LIBOR transition” is the movement of the financial markets away from using LIBOR as the interest rate benchmark to using alternative “risk free” benchmark rates (“RFRs”).
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.
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.
Risk premium of 2.50 per cent per annum on the markup rate of 3.50 per cent can be applied, if in case of risk-free benchmark rate, according to the notification.
In the policy, the BB has relaxed six months fixed tenure by allowing flexibility depending on the credit period for financing.
The central bank has already issued a circular in this regard, and also sent letters to the foreign exchange dealers (FED)or authorized dealer (AD) banks.
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, AD banks will refrain from arranging LIBOR-tag financing as and when global discourse is published with regards to the deadline for its use, the circular noted.
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 circular also allowed Islamic Shariah-based benchmark rates for Shariah-based finance.
The policy will be applicable to permissible usage import under suppliers'/buyers' credit.
In case of import finance, where the forward-looking benchmark rate with tenure link is absent, the relative rate applied as the benchmark rate for import finance may be compounded in arrears to calculate effective interest for the tenure of credit.
