Silicon Valley Bank: The Fallout in India
The need for funds in a high-interest regime is causing startups some concern as they seek to quickly move their monies out of the collapsed entity
US authorities have gone into damage control. The collapse of the Silicon Valley Bank was closely followed by the failure of New York-based Signature Bank. On Sunday, the Federal Reserve and the Federal Deposit Insurance Corporation and Treasury announced measures to rescue depositors’ money in full with support from other institutions to meet customer needs.
The SVB’s collapse comes at a time when banks are facing an erosion in their bond portfolios as treasury yields are headed north. However, experts believe that a broader fallout of the global banking system is low as SVB faced a double whammy in the form of a surge in tech borrowing alongside falling bond prices.
In fact, the Federal Deposit Insurance Corporation has already created a bridge bank for SVB customers while the Treasury has backstopped deposits above the maximum government-insured levels. In tandem, the Fed has set up an emergency funding pipeline for banks, all of which should keep the contagion from spreading.
Will the Fed continue to hike rates?
However, there is still the issue of what made SVB disintegrate and how the markets could respond to the situation that led to this scenario. For starters, markets expect the Fed to go slow with the rate hikes to combat inflation as US treasury yields are already softening. However, Fed chair Jerome Powell has not tired of reminding markets that there’s more pain on the radar.
Powell appears to be going by historical evidence from the 1980s that points to premature lowering of guard leading to subsequent distress in inflation control measures. Which means that the Fed might wait to see how the concerted response to the SVB collapse pans out before making its next move on inflation control.
In which case, the startup ecosystem itself would have to ideate on new mechanisms to cope, given the massive share of uninsured deposits with SVB. One such option for the startups would be to gain by diversifying their banking requirements even before acquiring scale. Which seems to be the route Indian startups with funds in SVB seem to be targeting.
Indian startups are finding ways to move funds
A report in the ET says several startups are finding ways to transfer their funds after the US regulators made their accounts accessible to depositors from Monday. Many of them are reportedly working with Indian and global entities to shift their monies out of SVB. Many have already opened accounts at Gujarat’s Gift City’s International Financial Services Centre.
There are also reports that several Indian entities such as Axis Bank, HSBC, Kotak Bank and ICICI Bank are working with these startup founders and investors to make the transfer of funds easier. Some are even exploring the option of moving deposits to neo-banks such as Brex in the US and other institutions like JPMorganChase.
Indian banks are perceiving the situation as one where they can support some of these startups with an Indian connection. In fact, many of these companies have been connected to Indian banks by their financial sponsors (read investors). The aim is to provide immediate support to these startups and thereby stop the contagion from spreading.
Many of the startups also spoke of the urgency among companies to shift their monies and how some VCs came to the fore offering zero-interest loans to meet immediate working capital requirements. Of course, none of these are purely altruistic in nature as most lenders would be offering terms that are stiff compared to what they had with SVB.
The report quoted officials from revenue-based financing start-ups to suggest that some of them were offering credit lines to the impacted companies to meet immediate cash requirements such as for managing payday on March 15. The report said about 60% of the startups reached out to by these financial institutions had already applied for a line of credit.