The IL&FS crisis highlights regulatory failure in the financial sector

IL&FS should not have been allowed to get to this stage

The ongoing crisis in Infrastructure Leasing & Financial Services (IL&FS) has cast a shadow on the entire financial sector. The complex structure of the lending that passed through IL&FS, as well as its structural characteristics, is partly responsible. IL&FS lent to many long-gestation projects through various subsidiaries. It partly funded this through high-rated debt. The problem is that sometimes a maturity mismatch can develop — long-term returns are funded by short-term debt. Naturally, this can be unstable and is susceptible to business-cycle downturns. Given the solid credit rating of IL&FS paper, it has been extensively and widely bought by various