Column : Their debt and ours

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: 160,000 crore. The second option of borrowing has, therefore, been the only route. Under normal circumstances this too would have been closed. For banks do not or rather should not lend to fund losses. But these are not ‘normal’ conditions. The government cannot clearly allow the companies to run out of cash and so they have “persuaded” the public sector banks to make the loans. The three companies have reportedly ratcheted up borrowings in excess of Rs 100,000 crores.

Against the backdrop of the present financial crisis, certain questions must be asked. How will the loans be repaid? Who will pick up the tab in the event of default? What are the implications for the banks of such “subprime” lending?

I do not have the answers to these questions but two trends seem clear. First the companies will be hard-pressed to repay the banks. After all, they are not investing this money in productive assets. They are using it to remain operationally afloat. Second, the government will not allow the companies or banks to go under. It would come to their rescue if it ever seemed that the companies had come too close to the edge. This is the political reality. The question should be asked. What might be the implications of such “moral hazard”. Management know that they can do little to improve the finances of their company and they also know that the government will, in the ultimate analysis, cover their losses. Does this not create that recipe for increased risk taking? I know that the public sector is not known to be risk takers but still one should ponder the longer term consequences on the companies of managerial imprudence and nonchalance.

The one lesson that we can draw from the Western crisis is that the tax payer picks up the tab when people duck away from fundamentals.