In other words, Standard & Poor was saying, if the financial institutions are going to keep debasing their own loan portfolios by taking on bad debts of other companies, why should anyone lend them more money?

And around a week prior to this, the Financial Services Authority of the UK, the independent supervisory authority of that country's financial system, warned that the Bank of Baroda's (BoB) UK branch didn't conform to various criteria and so may have to be shut down. Essentially, the FSA authorities appraised the bank's UK branch based on the overallperformance on the bank's entire Indian operations, which they found shaky.

They said the Indian bank had too many non-performing assets (essentially loans on which interest is not being paid on time, and on which therefore repayment also looks dicey), it was over-staffed, among a host of other shortcomings. The RBI's deputy governor S.P. Talwar who flew down to London to sort out matters did, apparently, manage to convince the FSA not to be hasty. It is still not clear, though, as to what assurances he gave them on how the problem of non-performing loans or over-staffing would be tackled, since this malaise affects all Indian public sector banks.

Now one could argue, and it's possible Talwar did too, that the UK authority had no business to judge banks in India. That all they should be concerned about is whether or not BoB would allow its UK branch to fold up in case of any crisis, since that is all that matters for deposit-holders in the UK. The problem, however, as Planning Commission member MontekSingh Ahluwalia explained to a spellbound seminar audience in the capital this week, is that the global community increasingly thinks it is their business.

One of the clear lessons of the twin crises in Latin America and south-east Asia, Montek argued, is that financial crises in any economically important region cause severe crises in others. So the best, and only, way to avoid such crises is to find a way to monitor and control such crises before the contagion spreads from one country to another, and finally across the globe, as it very nearly threatened to do this time around. That, in a nutshell, Montek argued, is what the New Financial Architecture is about.

A new world order, if you will, which is still evolving, but when it finally does, it will mean both lenders and investors will pay very close and detailed attention to financial structures in a country. And since it is difficult to get your investments out fast enough from a country after it gets into trouble, this means investors will prefer tokeep away from countries which don't satisfy this criteria at the very outset.

But don't they already do that? Why else do organisations like the IMF, the World Bank, and various private investor bodies keep harping on the country's fiscal deficit? That's true, but only partially. Under the New Financial Architecture, what will be under a microscope is not just the Central government's fiscal deficit, but even that of state governments'.

Nor will it stop at just that, since what is sought to be measured is essentially the country's vulnerability to internal and external shocks. So, if it appears that the Central government will allow a state government to get away with stopping repayment of loans to it -- states in India have got grace periods from the RBI on a few occasions -- this will be construed as a weakness. The Brazilian crisis, Montek points out, was triggered off by one of the country's regions telling the federal government it was repudiating the debt owed to the federal government. Once thishappened, global investors felt the Brazilian government was on the verge of going bust.

So, theoretically, anything which could increase the government's vulnerability can be added to this. If, for example, the impression spreads that the Indian government will never allow a bank to fold up, that it will always be bailed out, then some part of the non-performing loans of the banking sector could get added up as the government's liabilities. Or if, for example, nothing is done to ensure that state electricity boards become solvent, they will obviously start defaulting on their debt -- and since this is implicitly guaranteed by government, it could be added to the government debt burden, and so on.

The standard Indian reaction to this, both government as well as non-government, of course, will be that we don't have to accept this. We will fight this imperialism at the World Trade Organisation (WTO) and we will get all developing countries to back us. That's not the point. The issue's not part of the WTOyet, and may never become.

The point is that increasingly countries like Korea, Thailand and Taiwan are beginning to come around to the view that such controls are critical for world prosperity. Now once they do, chances are it'll be a matter of time before the others do as well. So isn't it better for us to begin seriously addressing such issues now, and work out a time-frame over which to do this. Or do we, as Montek puts it, want to be in the ranks of Zaire and Zimbabwe who are opposing this?