In the backdrop of a series of financial crises in various parts of the world in the 'nineties, several initiatives were taken to strengthen the international financial architecture. These initiatives were first given prominence at the 1995 Halifax Summit of the G-7 countries. In response to the financial crisis in parts of East Asia in 1997-98, these efforts were renewed with added thrust. In April 1998, Finance Ministers and Central Bank Governors of systemically significant economies met in Washington, D.C. to examine issues related to the stability of the international financial system. In accordance with the action agenda set at the meeting, working groups were set up in three areas: enhancing transparency and accountability, strengthening domestic financial systems and managing international financial crises. The Working Group on Enhancing Transparency and Accountability recommended that priority be given to compliance with and enforcement of high-quality accounting standards. It also recommended national standards for private disclosures that reflect timeliness, completeness, consistency, risk management and audit and control processes. The Working Group on Strengthening Financial Systems endorsed a broad international consultative process for the development and refinement of sets of standards and sound practices. The Working Group on International Financial Crises suggested several steps that could help reduce the frequency and limit the severity of international financial crises and also to promote the orderly, co-operative and equitable resolution of international financial crises.

As a sequel to these recommendations and those made by the Tietmeyer Report on International Co-operation and Co-ordination in the Area of Financial Market Supervision and Surveillance, the Financial Stability Forum (FSF) was set up by the Finance Ministers and the Central Bank Governors of the G-7 countries. The FSF brings together in a forum, the standards setting bodies, supervision agencies and national authorities, with a mandate to promote international financial stability, improve functioning of the markets and to reduce systemic risks through enhanced information exchange and international co-operation in financial market supervision and surveillance.

The FSF set up a Task Force (Chariman : Andrew Sheng) on Implementation of Standards relevant for a sound financial system presented its report in March 2000 and identified 12 key standards for a sound financial system viz., monetary and financial policy transparency, fiscal policy transparency, data dissemination, insolvency, corporate governance, accounting, auditing, payment and settlement, market integrity, banking supervision, securities regulation and insurance supervision. The key standards in these areas were prescribed by 10 standard setting bodies, viz., the IMF, World Bank, OECD, IASC, IFAC, CPSS, FATF, BCBS, IOSCO and IAIS. The Sheng Report also recognised that there has been good progress to-date in promulgating and assessing observance of international standards. The Fund-Bank experimental Reports on Observance of Standards and Codes (ROSC) provide framework for conducting these assessments, including by drawing on assessments conducted through the Fund-Bank Financial Sector Assessment Programme (FSAP).

India has supported the international initiatives on financial stability in various ways. It has also taken its own initiatives for improving transparency and accountability and for setting up international financial standards and codes. On December 8, 1999, the Reserve Bank appointed a Standing Committee on International Financial Standards and Codes (Chairman: Dr.Y.V. Reddy), in consultation with the Government, in order to (i) identify and monitor developments in global standards and codes being evolved especially in the context of international developments, and discussions as part of the efforts to create a sound international financial architecture; (ii) consider all applicability of these standards and codes to the Indian financial system, and as necessary and desirable, chalk out a road map for aligning India's standards and practices in light of the evolving international standards; (iii) periodically review the status and progress in regard to the codes and practices; and (iv) make available its reports on the above to all concerned organisations in public or private sector. The Standing Committee constituted ten Advisory Groups in the areas of accounting and auditing, banking supervision, corporate governance, data dissemination, fiscal transparency, insurance regulation, transparency in monetary and financial policies, payment and settlement systems and securities market regulation to examine the feasibility and time frame of compliance with international best practices. The Advisory Group on Monetary and Financial Transparency, Banking Supervision, Insurance Regulation, Payment and Settlement System and International Accounting and Auditing have submitted reports to the Standing Committee. The main recommendations of these groups are briefly given below.

The Advisory Group on Monetary and Financial Transparency (Chairman: Shri M. Narasimham) has recommended that the Government should set out objectives to the central bank, with parliamentary endorsement and accord it the necessary autonomy to fulfill its responsibilities, if necessary by amending the RBI Act. The Group recommended that the Government of India should consider setting out a medium term objective for monetary policy, viz., the inflation rate to the Reserve Bank. In the view of the Group, a reasonable degree of fiscal responsibility is also necessary to provide the central bank reasonable headroom to operate monetary policy. The Group also recommended setting up of a monetary policy committee (MPC) comprising of Governor, Deputy Governors and three other members drawn from the Central Board who are knowledgeable in the areas of macroeconomics, monetary analysis, central banking policy and operations in banking and finance.

The Advisory Group on Banking Supervision (Chairman: Shri M.S. Verma) assessed the position of Indian banking in respect of four major areas of supervisory concern, viz., corporate governance, transparency, cross-border supervision and banks' internal rating systems. The Group expressed the view that there was an urgent need to follow best practices in the constitution and functioning of bank boards by streamlining the process of induction and fixing accountability. The Group felt that the levels of transparency in the balance sheets of Indian banks would need to be further enhanced by stipulating disclosure in terms of maturity and repricing structure of all assets and liabilities, including calculation of capital requirements for credit and market risks, cumulative provisions against loan losses, impact of non-accrual and impaired assets on financial performance, effect of hedging activities on income and expenses and income effect of securitisation. As regards banks' internal rating systems, the Group proposed that banks should move to multi-dimensional rating systems from the hitherto uni-dimensional one, since the activities of the clients and the facilities enjoyed by them are themselves are manifold in nature. Finally, the Group was of the view that there is a need to strengthen management information systems in banks to ensure integrity and reliability in data collection and allow the use of statistical methods to arrive at informed policy making.

The Advisory Group on Insurance Regulation (Chairman: Shri R. Ramakrishnan) was of the view that the Indian position of allowing foreign companies to operate through joint venture arrangements with an Indian company with a shareholding not exceeding 26 per cent in the paid-up capital of the company, was not materially different from the international practices. Possibilities of expanding insurance coverage in rural areas through co-operatives could be explored. W hile the Indian requirements in respect of minimum capital requirements, deposit requirements, business plan and reinsurance were adequate, the Group recommended that minimum capital levels could be fixed for each class of business rather than on aggregate basis. The Group favoured the "file and proceed" requirements in respect of new insurance products, adopted in India, but recommended that the actuarial certification, premium rate tables and benefit design should be treated as public information, in the interest of transparency.

The Advisory Group on Payment and Settlement System (Chairman: Shri M.G. Bhide), in Part I of its report, critically examined two issues viz., status of clearing house operations as well as responsibilities of the Reserve Bank in the light of the consultative report on "Core Principles for Systematically Important Payment Systems" released by the Bank for International Settlements (BIS) first in December 1999 followed by in July 2000. It recommended, inter alia, extensive legal reforms especially empowering the Reserve Bank to supervise the payment and settlement system, institution of a framework ensuring at least the Lamfalussy standards for the deferred net settlement (DNS) system and such suitable framework for the real time gross settlement (RTGS) systems and spread of electronic-based transactions through appropriate price incentives. The Group was of the view that the Reserve Bank should eventually come out of the role of a payment systems provider except for funds settlement. In Part II of the Report, the Group examined the status of existing payment and settlement systems in Indian equity and debt markets including Government securities market and suggested ways for improvements in compliance with the G-30 recommendations on securities settlement system. It recommended, inter alia, introduction of rolling settlement in the liquid segment of the equity market, allowing current account facility with the Reserve Bank to clearing corporations for ensuring settlement facility on the books of the Reserve Bank as an interim measure pending eventual grant of limited purpose banking license to them with appropriate prudential guidelines thereon, building up of an institutional mechanism for centralised collection of information, their dissemination to market participants and prudential guidelines for implementing cross-merging across markets in order to deal with problems arising from participants undertaking multiple exposures in various markets at any point of time and permitting securities borrowing and lending system for institutions in both equity and debt segment in India.

The Advisory Group on International Accounting and Auditing (Chairman: Shri Y.H. Malegam) reviewed the availability of various accounting and auditing standards in India and compared them with the corresponding international standards. In case of accounting standards, the US Generally.

Accepted Accounting Principles (US GAAP) and the International Accounting Standards (IAS) served as the benchmark. With regard to auditing standards, standards issued by the International Auditing Practices Committee (IAPC) of the International Federation of Accountants (IFAC) served as the reference point. The Group noted that the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) has so far issued 19 standards, which are on par with those of international standards. The Auditing Practices Committee (APC) of the ICAI has issued 20 statements on Standard Auditing Practices (SAPs) and four additional statements on auditing which are anchored on the international standards.