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IL&FS Was an Avoidable Crisis
The infrastructure Leasing and Financial Services Limited, a systemically important non-banking financial company, has defaulted on its debt repayments. This has created turmoil in the NBFC sector and in the financial markets. Many analysts allege serious malpractices and fraud at IL&FS. Whatever the truth of these allegations, the fundamental problem at IL&FS was that of illiquidity arising from the use of short-term funds to finance infrastructure. The failure to address illiquidity early enough has pushed the company towards bankruptcy.
The Infrastructure Leasing and Financial Services Ltd (IL&FS), a non-banking financial company (NBFC), has been in the news for about two months now. From being a top rated company, it has hurtled towards bankruptcy. In the process, it has roiled the financial markets and created serious problems for the NBFC sector as well as the small and medium enterprises (SME) sector, which relies heavily on borrowings from NBFCs.
The IL&FS has for long been a mover and shaker in the field of infrastructure. Its role as a lender and arranger of finances has been less important than its role as a promoter of infrastructure projects, often in collaboration with state governments. Its combining of the two roles made it a rather unique company. The IL&FS enjoyed a triple-A rating from the rating agencies.
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