Ajay Shah, professor, National Institute of Public Finance & Policy, and a member of Financial Legislative Reforms Commission (FSLRC), explains to Jayashree P Upadhyay & Sudipto Dey, how Indian Financial Code will impact the financial markets. Excerpts:
What is the relevance of the Indian Financial Code for a developing market like India?
Indian finance suffers from myriad problems. Most households are cut-off from finance, most firms suffer from financing constraints, consumers are routinely mistreated, the bond-currency-derivatives markets don’t work, the monetary policy transmission is weak, and we regularly suffer from great bouts of inflation. These problems need to be diagnosed and solved. The IFC aims to create an environment for financial economic policy that addresses these problems.
The work on FSLRC began in the United Progressive Alliance (UPA) regime. Has the change of political regime — from UPA to National Democratic Alliance — created any disconnect on IFC?
No, I haven’t seen any such disconnect. In my experience, with financial reforms from 1993 onwards, the basic ideas and work plan have continuity across changes in the government. Voters do not care about the financial sector reforms directly: they do not have a view about (say) whether or not the commodity futures are regulated by FMC or Sebi. Voters only care about the end-product, which is that India should have high gross domestic product (GDP) growth.
The determining factor in financial sector reforms is the skill and capability inside the Ministry of Finance. When we have a strong and capable Ministry of Finance, progress is faster.
How does the IFC plan to handle the proposed convergence of regulators, given the multiplicity of regulations and laws that exist under different regulators?
The Ministry of Finance has to do the project planning about how the law will be enforced, once it is passed. That's true of all laws.
How should the different financial sector regulators prepare themselves for IFC?
A valuable step towards the IFC future has been in the form of the Handbook on adoption of governance enhancing and non-legislative elements of the draft Indian Financial Code, which features the governance improvements from FSLRC that regulators can adopt right now. Existing regulators need to substantially re-engineer themselves to improve governance in this fashion. This will be ideal preparation for IFC.
There has been public debate on RBI’s staunch dislike for the proposals of FSLRC and IFC. What is your position on it?
Incumbent agencies generally oppose reforms. This is not surprising. India's interests are more important than RBI's interests, so we should not be stopped from making progress.
If I worked at the RBI, I would not speak about RBI's role, turf, powers, accountability, etc. This violates a basic principle of natural justice: "do not judge your own cause". It is human to crave for more power and less accountability - we should check our base desires.
Could you share with us the proposed bodies as per the FSLRC report, outlining their functions?
FSLRC envisages a seven-agency structure: Financial Sector Appellate Tribunal (FSAT): An improved version of the existing Securities Appellate Tribunal which will hear appeals all across the financial system.
Public Debt Management Agency (PDMA): The investment banker for the government.
Financial Redress Agency (FRA): The one-stop shop where any individual goes to raise a complaint about a financial service provider, where the difficulty was first raised with the financial service provider, but not satisfactorily resolved according to the consumer.
Resolution Corporation (RC): A specialised organisation that will handle distress in certain kinds of financial firms.
Financial Stability and Development Council (FSDC): Deals with systemic risk, coordination, and development. This contains a database named Financial Database Management Centre (FDMC), which is the one-stop shop where all financial service providers electronically submit all the data that they have to give to financial agencies.
Unified Financial Authority (UFA): Consumer protection and micro-prudential regulation for all finance other than banking and payments.
Reserve Bank of India (RBI): Monetary policy, and consumer protection and micro-prudential regulation for banking and payments.
In addition, there is the existing Financial Intelligence Unit (FIU) and the Ministry of Finance. Thus the full financial system will contain nine agencies in the destination state.
The FSLRC has taken cues from the reforms in the United Kingdom, which is way ahead in its evolutionary curve than the Indian financial markets. Your comments?
As part of the work process of FSLRC, on all issues, it was standard procedure to study four countries: Canada, Australia, UK, US. This was the intellectual raw material on thinking about questions. The Commission designed law and institutional arrangement which would make sense in India. There was no country which was a particularly important role model. You mentioned the UK: I think the FSLRC proposals are similar to the UK in the FRA and the FSAT, but not in other areas.
How are we placed in terms of implementing the recommendations of FSLRC?
There are three tracks in the story. The Ministry of Finance is evaluating all the feedback that has come on the IFC, and is refining the draft of the law. Regulators are re-shaping themselves to come up to the good governance norms of the Handbook. The Ministry of Finance has setup “task forces” to construct four institutions that would be required for enforcing the IFC. These are: the FSAT, the RC, the PDMA and the Financial Data Management Centre (FDMC). This work is now a few months old.
How would the Indian financial market look like after implementation of Indian Financial Code, and the FSLRC recommendations?
The IFC would improve the good sense in financial economic policy in a practical and down-to-earth sense. This would be a gradual process in that one by one, the regulations of today would get replaced by superior regulations. Over a few years, we would get the unfolding of a financial system that caters to India’s needs.