Libor transition: BB sets new interest rates for short-term trade finance
A banker thinks the new benchmark will not differ greatly from the Libor rate
The Bangladesh Bank has issued a circular on setting new interest rates for short-term trade financing in the wake of changes in the London Interbank Offered Rate (Libor).
The Foreign Exchange Policy Department issued the circular on Monday, informing all the authorised dealer (AD) banks concerned that the interest rates would be determined by adding a markup of 3.5% to the new benchmark in the international market system, while a 2.5% annual risk premium would also be added.
On condition of anonymity, the treasury head of a private bank told The Business Standard that they would follow the benchmark since it is an international matter.
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He thinks the new benchmark will not differ greatly from the Libor rate.
There should not be a big difference as the interest rates depend on market transactions, he added.
The UK's Financial Conduct Authority will reportedly end Libor after 2021 while the Declaration of Libor will completely be phased out from July 2023.
It is expected that from 2022 onwards, all new loans and letters of credit (LCs) will be priced differently in addition to carrying out entire outstanding loans and LCs by switching Libor to the new reference rate.
The central bank circular focused on short-term trade financing for which six-month Libor and 3.5% risk premium per annum can be applied at present.
It allowed, besides Libor, reference/benchmark rates in the currency of financing with a prescribed mark-up for discounting/early payment of export bills.
In case of risk-free benchmark rates, risk premium of 2.5% per annum on the markup rate of 3.5% can be applied, according to the circular.
The circular relaxed the six-month fixed tenure by allowing flexibility, depending on the credit period for financing.
In absence of the tenure-linked rate, like three or six months, the relative rate may be compounded in advance to calculate the effective benchmark rate for the specified tenure.
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.
According to the circular, the respective benchmark rate may be applied during the credit period as per mutual understanding with the lenders concerned in case of the necessity to phase out Libor.
In addition, AD banks will refrain from arranging Libor-tag financing when global discourse is published with regards to the deadline for its usability.
