From my perspective it's a pretty complicated question. Like loans can be very beneficial if they are used to make sensible investments. So that's a good reason to give them out. But as you mention if it just goes straight into the private pockets of bad people that's not good. But realistically it's never so black and white. Some money will be used for sensible investments, some will be used to build a giant statue of the leader, a third part to cousins, and a fourth to buy votes. So it's a question, is a sufficent proportion used for good? And also is the leader legitimate? If a leader is very impopular then we may say the he cannot take loans on his people's behalf, that the people are not bound by any agreements he makes.
But anyway I'm curious about your thoughts, what is the alternative? How would a better system look like?
IMO a bureaucrat shouldn't be able to put an institution in debt.
This sounds strict, but think about it: every single company I've seen (correct me if this is biased in the wrong direction) doesn't allow just any employee to take out a loan. Heck, even the CEO can't just go to the bank and take out a loan if the collateral are assets/equity in the company - the board needs to approve that.
Why would we allow someone who's tenure is basically guaranteed to be <5 years to take out loans?
I know this sounds like a non-answer but maybe it's that simple: a specific institution/bureaucrat can't take leverage. The central govt can take out loans and increase budget to hand out.
But anyway I'm curious about your thoughts, what is the alternative? How would a better system look like?