The present scenario is that most Indian firms are steeped in debt and in most cases these are owed to domestic financial institutions. In most cases these are term loans though there are also debentures which have been taken up by them. With global recession and the opening of the markets these companies have in most cases defaulted on the debt. It is another matter that many of the companies have brought more misery on themselves by diverting huge resources into promoting power, telecom and otherprojects thereby bleeding the parents. But the net effect is that lenders have large bad loans and government mutual funds and insurance companies have huge blocks of equities which have depreciated.

One issue which has not received its due attention is the level of responsibility that the lenders have to take for the present situation. In comparison, in the rest of Asia where there are similar problems of bad debts, the focus has been more on the decision making apparatus in the lending organisations. Though there are no two opinions that the lenders have taken a big hit it is my view that they have to take equal responsibility for the situation.

Most of these loans which are bad were contracted at a time when the financial institutions were the sole source of all debt funding in the country. In fact I recollect the government licences of the day used to stipulate that the recipients of the licence should approach a government institution for finance. Further the Controller of Capital Issues whoregulated capital flow used to insist on the projects being whetted by the government financial institutions. Even today Sebi continues to give great value and importance to the wisdom these lenders. Companies are not allowed to raise capital in India unless they have a long track record of profits. But such is the faith in the wisdom of these lenders that this important regulation is liberalised where there is a government institution appraising the project and taking a minor exposure.

The philosophy behind all regulations was that these financial institutions had the necessary skills to analyse these projects deeply and the integrity to use these skills to protect investors and others who did not have these skills. However, it has been seen that the appraisal of financial institutions became a dhobi mark and has been no insurance regarding the quality of the project. One could go as afar as to say that practically all projects which have turned sick in India were once appraised by financial institutionswho signed off as regards their viability.

The reason for developing this argument is not to pillory these institutions or to ask for an inquisition as is being done in the rest of Asia but initiate an argument into the present decision-making processes that rule in these organisations. It is essential that the expertise of these institutions is beefed up considerably to ensure that such bad loans of large proportions are not given in future. After all public money is involved. To my mind, in spite of the monumental bad loans there does not appear to be any revolutionary change in the way decisions are made and there is a great amount of inbreeding still going on. The whole system is opaque and leadership is drawn totally from the ranks whose international exposure is minimal. Top positions go strictly by seniority and no outside blood is inducted. The world over lenders take in lateral hires on a massive scale as they acknowledge that lending has become too complicated to be left to insiders however brightthey may be.

Furthermore the attitude of ``you the businessman made the mistake; so you pay for it'' should be replaced by ``we both made the mistake; I am also to be blamed'' attitude. If at all anybody is the real fall guy he is the investor who put in his money thinking that the lenders knew how to appraise projects. The present environment of bad debt is conducive for making some much-needed changes in the way loans are made in India

The author owns a private investment banking firm in Delhi and is a former country head of Citibank's merchant banking division