What changed
Previously, banks were required to use LIBOR/EURO LIBOR/EURIBOR as benchmark rates for extending Pre-shipment Credit in Foreign Currency (PCFC). Now, RBI has allowed banks to adopt any other widely accepted Alternative Reference Rate in the relevant currency, as per the circular dated August 6, 2021.
What it means for you
Banks gain flexibility to choose alternative benchmarks like SOFR or SONIA for PCFC, reducing reliance on LIBOR which is being phased out. This ensures continuity in export credit operations without disruption, though banks must ensure the chosen rate is widely accepted and compliant with other existing guidelines.
What you must do
- Review your current PCFC loan agreements and update benchmark rate clauses to include alternative reference rates.
- Train treasury and credit teams on new alternative reference rates (e.g., SOFR, SONIA) for foreign currency export credit.
- Communicate with export clients about the change in benchmark rates and any impact on loan pricing.
- Ensure all other instructions regarding export credit remain unchanged and are followed.
Who it affects
Scheduled Commercial Banks (excluding RRBs), Primary (Urban) Co-operative Banks with AD Category-I license, Small Finance Banks
What is the key change in this RBI notification?
Banks can now use any widely accepted Alternative Reference Rate instead of LIBOR for Pre-shipment Credit in Foreign Currency (PCFC). This is due to LIBOR's impending discontinuance.
Does this affect other export credit products?
The notification specifically addresses Pre-shipment Credit in Foreign Currency (PCFC). All other instructions on export credit remain unchanged.
Which banks are covered by this circular?
All Scheduled Commercial Banks (excluding Regional Rural Banks), Primary (Urban) Co-operative Banks holding AD Category-I license, and Small Finance Banks.