Implementation of Financial Standards and Codes: Indian Perspective and Approach
[Source: Paper presented by Dr. Y.V. Reddy, Deputy Governor, Reserve Bank of India at Conference on International
Standards and Codes organised by IMF-World Bank at Washington DC on March 7-8, 2001. ]

India's Stand (Section 1)

India is fully supportive of the need to observe certain minimum universally accepted standards in areas relevant to the maintenance of stability in the international monetary system, including increased transparency in formulation and implementation of monetary and financial policies and improvements in dissemination of relevant data. The establishment of a high-powered Standing Committee on International Financial Standards and Codes (Standing Committee) underscores India’s commitment to this international enterprise. At the same time, India has been voicing, in the international fora, some of its concerns regarding the manner of international financial institutions spearheading the implementation and assessment of codes and standards. India advocates a voluntary approach, fair, equitable, and continuous process taking duly into account the institutional and legal structure and stage of development in different countries.

Although the notion of a code of good practices is intuitively appealing, the temptation to prescribe universally valid model codes which do not allow for differences in institutional development, legislative framework and, more broadly, different stages of development, must be avoided. Sometimes there is a tendency to recommend the practices of major industrial countries to developing country environments without adequate consideration being given to a country’s stage of development and its ground realities

Moreover, it stands to reason that the accent should be on voluntary adoption and gradualism rather than a big bang. In fact, the process may, in any case, be a medium term one and hence one should not look for instant compliance. Basle Core Principles of Banking Supervision offers an interesting example of how a standard attains a near universal acceptance based on voluntary participation and country ownership. It is also important that the manner in which these international standards are monitored does not degenerate into categorizing countries as ‘performers’ and ‘non-performers’. In other words, the transformation of a best practice goal should not result in premature conditionality for countries that approach the Fund for balance of payments support.

The extent pace and sequencing should ideally be left to the country authorities. In keeping with this spirit, it has been held that the International Monetary Fund (Fund) may furnish the ROSCs (Reports on Observance of Standards and Codes) in respect of individual countries only with the countries’ specific permission. The release of Article IV reports should also be left to the judgment of individual governments. This is because the goal of transparency could best be served by a balanced and symmetric evalution of data as between the authorities and the private sector.

It must also be added that the plethora of codes, standards and principles could be overwhelming and also highly demanding of manpower and financial resources. They also have a potential to become overly intrusive vis-à-vis national authorities. In any case some prioritisation of Codes for considering implementation is inevitable in respect of each country. There is a strong case for undertaking or fostering more intensified research on the relationship between implementation of standards and macroeconomic and financial stability.

Work on standards and codes is evolving in relevant interational fora and priorities for implementing them would have to vary from country to coutry. In this regard, the potential for self-assessment on the part of individual countries needs to be explored. Besides being cost-effective, such an approach would also greatly facilitate country-ownership.

Some of the other serious concerns that deserve attention in this regard pertain to the specificity and the source of financial difficulties that might have to be adequately reckoned in individual cases. Since financial crises can have multiple causes, overemphasising financial standards could detract attention from other policy priorities. The relative importance of financial standards in crisis prevention must also be adjudged from the standpoint of the relative openness of the economy’s capital account and in this sense the "one size fits all" approach may have to be eschewed.

Since the primary motive for having standards is to catalyze orderly capital flows, while ensuring financial stability, greater consultation with the private sector in evolving and prioritizing of core standards is of utmost necessity. All standards and codes are not equally relevant to all segments of private sector and further they do tend to evolve over a period reflecting concerns of both public policy and market participants.

It is gratifying to note that currently there is a better appreciation of India’s stand in the international fora as compared with the past.

1. India has been closely associated with various standard setting bodies and has been taking active part in the work of several key international fora devoted to the task of developing and promoting implementation of financial standards and codes. Although India is not a member of the Financial Stability Forum(FSF)@, it was one of the countries specially requested to help the Forum in Task Force on the Implementation of Standards and to participate in the Joint Committee Group meeting. The Task Force was set up to explore key issues relating to standards/codes/core principles and consider the strategy for fostering the implementation of international standards relevant for a sound financial system.

2. The Reserve Bank is also represented at the Follow Up Group on Incentives for Implementation of Standards instituted by the FSF following submission of the Task Force Report. The Group has been ascertaining how various elements of market and official incentives could best reinforce one another within the framework of the overall strategy to foster implementation of standards and, for this purpose, engages in a dialogue with a cross section of relevant market participants.

3. Reserve Bank of India officials worked closely with the Basel Committee on Banking Supervision(BCBS). In 1997, in consultation with the supervisory authorities of a few non-G-10 countries including India, the BCBS drew up the 25 ‘ Core Principles for Effective Banking Supervision’ aimed at guiding supervisory authorities seeking to strengthen their current supervisory regime.

4. From its inception, India was also represented on the Group on Joint Task Force on Securities Settlement Systems constituted by the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO).The CPSS and IOSCO have since released the report of the Task force in January 2001 for public consultation. Based on the comments received, the Task Force will develop the final recommendations.

5. As a member of the Core Principles Liaison Group (CPLG) constituted by the Basel Committee on Banking Supervision(BCBS), the Reserve Bank has been attending the meetings of the Group and actively contributing to the discussions.

6. The Reserve Bank is also represented in the Working Group on Capital(WGC) set up by the CPLG. Recently, during February 6 to 9, 2001, the Reserve Bank of India hosted the meeting of the Group in Delhi to discuss the salient features of the second consultative paper issued by the Basel Committee. The meeting was attended by 26 representatives of supervisory agencies from several non G-10 countries as well as from international financial agencies.

7. India is one of the countries that has sought participation in the joint IMF-World Bank Financial Sector Assessment Programme (FSAP). As part of the Reports on Observance of Standards and Codes (ROSCs), India’s compliance in respect of five standards and codes has already been assessed, viz., Monetary and Financial Policy Transparency, Banking Supervision, Securities Market Regulation, Payment and Settlement system and Corporate governance.

8. Furthermore, the professional expertise in the Reserve Bank of India has been made available to IMF/World Bank in their FSAP exercises in other countries.

The Indian approach to implementation of financial standards and codes is based on the efficiency-enhancing elements of the standards and codes, and on the need to consider them as part of process of institutional development in the country, while not ignoring their relevance to domestic as well as international financial stability. Thus, they are viewed as an integral part of the process of economic reform, most appropriate to the country’s needs. The emphasis is on creating awareness to promote adoption by the relevant official agencies, self regulating bodies and market participants rather than prescribing compliance at the instance of a central authority.

The Indian approach to the implementation of standards and codes is noteworthy in that it follows a systematic process. The process consists of the initial recognition, identification and taking on record of standards and codes in relevant areas. This is followed by in-depth assessment by independent experts of issues pertaining to the present status of applicability, relevance and the existing degree of compliance, the feasibility of compliance and the earmarking of the possible time frame for transition given the prevailing legal and institutional practices. It is also common to seek comparison of the levels of adherence in India, vis-à-vis industrialized and emerging economies, particularly to understand India’s position and to prioritize actions on some of the more important codes and standards. The process seeks to map out a comprehensive course of possible actions for achieving the best practices. This approach is put in the public domain through publication of Reports on each of the selected standards and codes.

The next stage involves putting efforts for the widest possible dissemination of expert opinion on the subject in the form of the reports mentioned and by means of outreach programs like seminars and workshops. The objective is to obtain involvement and stimulation of interest among public- authorities and other stake holders in the debate and to garner a higher level of general awareness on the subject. This is to be followed by invitation of and consideration of inputs and feedback from relevant public and private sector organizations to enhance the sense of involvement and to build confidence. Such a participative and consultative approach is advocated to secure a convergence of viewpoints and, hence, favorable public disposition towards the necessity of change.

In order to facilitate positioning of international financial standards and codes in relevant areas of the financial system in India and to guide the overall process of implementation of appropriate changes in respect to various segments of the financial system, the Reserve Bank of India in consultation with Government of India, in December 1999, constituted a ‘Standing Committee on International Financial Standards and Codes’ under the Chairmanship of Deputy Governor, Reserve Bank of India and Secretary, Economic Affairs, Government of India as Alternate Chairman. The Committee could co-opt members depending on the subject under consideration.

The Committee has been enjoined with the responsibility of identifying and monitoring developments in global standards and codes being evolved especially in the context of the international developments and discussions as part of the efforts to create a sound international Financial Architecture, considering all aspects of these standards and codes to Indian financial system. The Committee has also been asked to consider plotting a road map for aligning India’s standards and practices as necessary and desirable in the light of evolving international practices, periodically reviewing the status and progress in regard to the codes and practices; and reaching out its reports on the above to all concerned organizations in public or private sectors.

The Standing Committee by itself will not take a view on the Standards and Codes and it will disseminate views expressed on the subject mainly on the basis of the Advisory Groups constituted by it in different subject areas. The Standing Committee will identify action points that may arise out of the views expressed and also make a mention of these to the concerned authorities viz., Government, Reserve Bank of India, Securities and Exchange Board of India(SEBI) etc., thus acting as a catalyst in the whole process, while leaving it to the concerned institutions to consider appropriate measure. The Committee will no doubt make arrangements to track the progress in implementation.

The Advisory Groups constituted by the Standing Committee on International Financial Standards and Codes in ten core subject areas pertaining to the financial system are entrusted with the task of studying, in detail, the present status of applicability and relevance and compliance of relevant standards and codes, reviewing the feasibility of compliance and the time frame over which this could be achieved given the prevailing legal and institutional practices, comparing the levels of adherence in India, vis-à-vis in industrialized and also emerging economies particularly to understand India’s position and prioritize actions on some of the more important codes and standards, and to chalk out a course of action for achieving the best practices.

Out of the set of twelve subjects(actually eleven as Accounting and Auditing are taken together) areas for which standards and codes that have been prescribed by international financial institutions and other standard setting bodies pertaining to the financial system, the Standing Committee has so far identified ten core subjects for immediate attention and assessment by Advisory Groups. These are, Transparency in Monetary and Financial Policies, Data Dissemination, Payments and Settlement System, Banking Supervision, Securities Market Regulation, Accounting and Auditing, Fiscal Transparency, Insurance Regulation, Bankruptcy Laws and Corporate Governance. The twelfth area namely ‘Market Integrity’ associated with the forty recommendations of the Financial Action Task Force(FATF) on money laundering is not being presently looked into by the Standing Committee.

It may need to be mentioned that all Advisory Groups are chaired by eminent experts not generally holding official positions in Government or other regulatory bodies. While the Chairmen of these Advisory Groups were identified and nominated by the Standing Committee, taking into account the experience and expertise, the choice of members of these Advisory Groups, was completely left to the Chairmen of Advisory Groups. The members are generally non-official experts in relevant subject areas. The Groups have, however, the option of including officials from Government, Reserve Bank of India, SEBI, etc., as special invitees. Such officials help in providing inputs on the understanding of extant position relating to the relevant standards and codes and also the steps under way towards improvements. This arrangement keeps the Advisory Groups outside the sphere of official influence and allows them to make critical assessment of relevance as well as state of compliance with standards and codes and give unbiased recommendations with regard to the feasibility of compliance and the necessity of achieving best practices in the areas covered by them.

In order to facilitate exchange of information and expertise on matters of mutual interest, the Advisory Groups have the option of having interactions/consultations amongst themselves and many did exercise the option. The Advisory Groups may also jointly deliberate on overlapping issues in certain subject areas to evolve a consistent approach. In finalizing its Report, the Standing Committee would, however, attempt to consolidate these overlapping areas. The Reports of the Advisory Groups are made public, as soon as they are submitted to the Standing Committee.

The Standing Committee also periodically reviews the progress of Advisory Group and is required to review its own status after the completion of one year and report to Government/RBI. The Secretariat support to the Standing Committee is provided by the Reserve Bank of India.

Note: Section: 5 -"Work Process" describes how the methodology follwed by the Standing Committe and advisory groups in handling the task. This section is skipped as this is not of relevance for understanding the core subjec.
Section -6: dealing with current Status (as at 2001) is now stale and hence alaso skipped