Banks may have problems with loan disputes and defaults after Libor switchover

As the end date approaches for the London Interbank Offered Rate (Libor) — the benchmark that has been in vogue for decades for pricing of loans — the Reserve Bank of India (RBI) has asked the banking industry to figure out the transition path for dollar loans in cases of disputes, delays and defaults.

After allegations of manipulation and collusion by big global banks, the end of Libor began in 2017, with 2023 decided as the last year in the transition road. By end-2021 many banks had stopped drawing contracts using Libor and June 2023 was set as the deadline for replacing the guiding rate.

While multiple alternative rates have been proposed, it is feared that the transition would not be smooth where there are disputes between borrowers and lenders, particularly in matters where the loan terms may have to be rejigged and borrowers may not be cooperative.

The banking regulator has asked the industry body Indian Banks’ Association (IBA) to explore ways to suggest possible rules for migration from Libor, two people familiar with the matter.

“A difficult borrower and its legal team can always argue that the loan documentation does not provide for switchover to another rate. Even the courts cannot apply it retrospectively. So, this is an issue that has to be sorted out,” said a bank CEO.