IL&FS crisis: Here's what India should have learnt from Walter Bagehot

India's shadow banks need to securitize more of their loans

Almost 150 years later, Walter Bagehot’s advice on how to deal with a liquidity crisis still rings true. The problem, as India found out last month, is in implementing it.

Bagehot wrote in his 1873 treatise “Lombard Street” that central banks should curb panic by lending “quickly, freely and readily” to any bank that can offer “good securities” as collateral.

When the sudden insolvency of IL&FS Group, an infrastructure lender, spread panic through India’s money and equity markets, the Reserve Bank of India had no qualms about acting on the first part of Bagehot’s prescription. The trouble came with Part