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Thursday, June 19, 2014

Understanding the Handbook that precedes the Indian Financial Code

Raghuram Rajan recently used his bully pulpit to increase the prominence of the draft Indian Financial Code (IFC). In order to help you, gentle reader, figure out the mistakes of his speech, we have released a batch of videos.

The key materials about the IFC are a gentle paper, the report, and the law. The Ministry of Finance and all financial agencies have decided to adopt the Handbook on adoption of governance enhancing and non-legislative elements of the draft Indian Financial Code, through which the gains of IFC are brought forward in time.

The IFC and the Handbook are subtle. For people without the relevant background in public administration, law and public economics, and an understanding of what works and does not work under Indian conditions, a lot of it appears impressionistic and faddish. A substantial increase in skills is required in order to build State capacity, in the form of public agencies that work satisfactorily. To help carry the process forward, we recently hosted a workshop for all financial agencies, and MOF, at NIPFP on this Handbook. In my knowledge, this was the second time in history that senior staff from all financial agencies got together in a two-day workshop: breaking down the silos of Indian finance is the essence of the IFC. All the videos are now on youtube :

  1. Inaugural address by the Hon'ble Finance Minister and Dr. Rathin Roy, Director, NIPFP. Link.
  2. Regulators as Mini States: A discussion of the rule of law in regulatory governance, and the importance of separation of powers. Link.
  3. Framing Regulations (Handbook Chapter 4): An overview of the process by which the Boards of regulatory bodies are to frame regulations. Link.
  4. Cost-Benefit Analysis (Handbook Chapter 4): An overview of the cost-benefit analysis that is to be carried out by financial regulators as part of the regulation-making process. Link.
  5. Consumer Protection (Handbook Chapter 2 and Chapter 3): An explanation of how consumer protection is to be incorporated into financial regulation. This includes additional protections for retail consumers. Link.
  6. Role of Board and Transparency (Handbook Chapter 6 and Chapter 7): A discussion of the critical role of the Board as the apex body within a financial regulator, and the need for transparency in regulation. Link.
  7. Approvals, Notices and Investigation (Handbook Chapter 9, Chapter 5 and Chapter 10): A discussion of the some of the executive functions of a financial regulator: granting approvals, issuing notices and conducting investigations. Link.
  8. Adjudication and Penalties (Handbook Chapter 11 and Chapter 12): Adjudication and penalties in the context of Indian Financial Regulation, and a practitioner's perspective on the intersection of law, business and regulation. Link.

The full playlist might also be useful.


  1. I am not a disinterested party in this debate. However, I have an open mind as to the merits and demerits of the FSLRC recommendations. Raghu Rajan (RR henceforth) basically raises three issues:
    First, while the committee talks about synergies, it does not pay heed to the synergies that is lost due to implementation of IFC. The first that comes to my mind (and not mentioned by RR) is relating to RBI's open market operations in bonds and bond market regulation. There is a synergy in terms of valuation, risk management, oversight if the process remains with RBI which is lost if the job is taken up by an unified regulator.
    Second. The appellate tribunal has the potential to render existing regulators 'paper tiger'. While routine administrative issues can be questioned in the tribunal but not policy decisions like for example, why Basel III implementation in India has been deferred till 2019 and the like. Moreover, there are no settled case laws which will guide the Appellate tribunal and the appointment for people manning this tribunals may itself be subject to a lot of rent seeking behavior (not mentioned by RR). RR talks about mechanism design and 'incomplete contracting' which are additional issues to be pondered about, in this regard.
    Third, Instead of drawing up grand schemes with significant implementation risks the focus ought to be on incrementalism, i.e. if it ain't broke, don't fix it.
    Incidentally, I look forward to the 'errors' video which is yet to be posted. You will agree going through the individual videos and figuring out possible errors is fairly, shall we say, 'unsynergistic'.

  2. Raghuram Rajan has stated that while there are many admirable aspects about FSLRC , he highlighted a few issues with some of its recommendations. Instead of talking in generalities by providing some videos to address the so called "errors" in his speech, the blogger may please endeavour to detail them himself for the benefit of so called "illiterates" calling the report as impressionistic and faddist!

  3. I should say that as a neutral observer in this episode I found his speech to be brilliantly argued and brutally frank very unlikely a conventional central banker.As indicated in one of the earlier comment, I dont think he is fundamentally against FSLRC recommendations per se but only in some of its constructs. I think we are in for a great debate ad deliberations which has been started off superbly by Raghuram Rajan.
    Rajeev Ranjan

  4. There is always a difference between "this side of the table and that side of the table". (RR as FSLRC member and as RBI Gov. )

    Although I sincerely believe there are no grammatical mistakes in the speech,(:wink:) there are few points which can be taken on face value.

    As far as "this side of the table and that side of the table" is concerned RBI should hire laterally to make its workforce more open to change.


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