The US regulators’ shutdown and takeover of Silicon Valley Bank (SVB) has raised concerns about the impact on India’s startup industry. It was a critical partner in the global startup economy.
What is SVB crisis?
- Silicon Valley Bank, one of the largest American commercial banks, is managed by SVB Financial Group.
- It announced a $1.75 billion share sale programme last week to strengthen its balance sheet.
- This programme resulted in a massive sell-off of the company’s stock.
- Following that, the market became extremely bearish, wiping out over $80 billion of its market value.
- Concurrently, the group’s bond prices collapsed, causing a market panic.
Reasons for SVB’s demise
- Technology stock decline: The bank has been hard hit by the recent decline in technology stocks, as well as the Federal Reserve’s aggressive plan to raise interest rates to combat inflation.
- Lower bond yield due to lower interest rates: SVB has purchased billions of dollars in bonds over the last few years, using customer deposits as a typical bank would.
- Account holders primarily from startups: SVB’s customers were primarily startups and other tech-centric businesses that had become increasingly cash-strapped in the previous year.
- Venture capital funding was drying up, and companies were unable to obtain additional rounds of funding for unprofitable businesses.
- Fear of deposit insurance: Because its customers were primarily businesses and the wealthy, they were likely more concerned about a bank failure because their deposits exceeded the $250,000 government-imposed limit on deposit insurance.
Immediate consequences of SVB’s failure
- Startups are scrambling: Many startups and other businesses that relied on the bank’s services were suddenly cut off from their funds, causing financial strain and uncertainty.
- They now fear that they will have to halt projects, lay off or furlough employees until they can access their funds.
Significant implications for SVB
- Silicon Valley Bank is still dealing with two major issues:
- Massive uninsured deposits: Because of its largely startup and wealthy customer base, the vast majority of these were uninsured.
- There is no scope for asset reconstruction: Silicon Valley Bank has no potential buyer.
Could this result in a repeat of what occurred in 2008?
- There is no possibility: At the moment, experts do not anticipate any problems spreading to the broader banking sector.
- Customer base diversification: Other banks are far more diverse in terms of industry, customer base, and geography.
The effect on Indian startups
- Deposit uncertainty: The failure of SVB is likely to have repercussions for Indian startups, many of which have significant amounts of money deposited with the bank.
- SVB has been a significant player in the Indian startup ecosystem, providing banking services and funding to many of the country’s most successful startups, including Flipkart, Ola, and Zomato.
- This could cause a cash crunch for many businesses, forcing them to cut costs, postpone projects, or lay off employees.
- SVB has also been instrumental in assisting Indian startups in expanding into the US market by providing them with the necessary infrastructure and support to establish operations in Silicon Valley.
How can Indian startups lessen the blow of SVB’s failure?
- Diversify banking relationships: Indian startups with funds deposited with SVB may want to consider diversifying their banking relationships in order to reduce their reliance on any one bank.
- Alternative financing may entail opening multiple bank accounts or investigating alternative banking services such as digital banks or fintech startups.
Source: https://www.thehindu.com/news/international/explained-what-caused-silicon-valley-banks-failure/article66606700.ece