RBI should check if rigged Libor gypped our borrowers
Can we trust our bankers – any banker? Ever since Lehman Brothers crashed in 2008, the world has been wary about big banks that are too big to fail. The fear is that they are greedy, they rig things to their benefit, but are largely unaccountable for the systemic damage they cause in the end.
This opinion is likely to be reinforced with the Barclays Bank scandal, where the bank has agreed to pay $453 million in fines to US and British regulators after the bank pleaded guilty to rigging inter-bank lending rates, the London Inter-Bank Offered Rate (Libor) in particular. Libor is an artificial, but indicative, rate set by the British ...view middle of the document...
He apparently suggested, though in not so many words, that nothing would be amiss if Barclays reported lower interest rates.
All this would be nice drama for us to salivate over but for three important points.
One, Libor is the basis on which over $800 trillion of borrowings and derivative instruments are priced all over the world. If Libor can be manipulated by phone calls and nudges and winks from the Bank of England, or for collateral purposes by the big clearing banks in the UK, the world would be right to consider it a rigged rate, and not one determined by actual market conditions. The world should sue BBA.
Two, India would be a particularly affected borrower due to this manipulation of Libor in the post-Lehman period. Big and small Indian companies that raise external loans in dollars or euro pay interest rates based on Libor. In fact, we always end up paying a huge premium over Libor most of the time. The RBI imposes an all-in cost ceiling of 200 basis points (2 percent) above Libor on trade credits and other loans upto three years. For external commercial borrowings (ECBs) from three to five years, and for loans above five years, the cost ceilings are 300 basis points and 500 basis points above Libor. Indian companies pay a huge price over and above Libor.
If the Libor is an arbitrary rate and can be rigged so easily, the RBI needs to take a close look at whether Indian companies have been gypped. Of course, they may also have benefited if Libor was artificially held down after Lehman, but for much of the time before that, there was no indication that rates were artificially lowered on a wink-and-a-nod. They could well have been higher. Question: did we pay more then?
Three, given the apparent risks in allowing so-called market rates to be set by participants who may or may not have vested interests, the RBI should take a close look at how rates are set even in India. Like Libor, the local inter-bank market has something called Mibor – the Mumbai inter-bank offered rate – which is calculated by the National Stock Exchange (NSE) based on the weighted average of reported bank lending rates.
According to The Economic Times, the NSE uses “robust statistical techniques” to confirm the veracity of the rates indicated by the big banks, and also eliminates the outlying rates to arrive at a mean that is broadly indicative of lending conditions on a day-to-day basis.
Thankfully, actual interest rates are not set by...