Don’t Keep All Eggs In One Basket: Learnings From SVB Crisis
In a move that sent global banking shares into turmoil, United States (US) regulators on 10 March (local time) shut down Silicon Valley Bank (SVB), as markets fretted over possible contagion from the second biggest banking failure since the 2008 financial crisis in American history.
The panic reached India as well but in this context, the SVB crisis may be limited to tech startups and IT firms, especially those who had deposits with this bank. Experts have reiterated in several conversations that any broader contagion effects that may arise in future will not reach Indian shores in a hurry nor are they likely to trigger “systemic risks” in the nation.
This being said, SVB brings learnings that go beyond the banking sector or its impact on the startup and tech sectors.
Lessons For bankers
“They (banking and financial institutions) should not be swayed by the greed of higher interest rates to put all their deposits in one single entity. The lesson for the Indian financial institution is simple — improve their risk management framework and have a real-time analysis of Asset Liability Management (ALM). With every interest rate swing, the ALM needs reinforcement,” commented Srinath Sridharan, Author, Policy Researcher and Corporate Advisor.
The SVB shuttering, followed by Signature Bank collapse, are some implications of the prevalent financial turmoil since last year. While these can be seen as global areas of concern, it is clear that these do not impact India given that the country’s banking system is regulated and the economy is resilient.
“If we look at the bigger picture in the SVB crisis, poor investments and ALM mismatch are the main reasons for the collapse. The bank did not hold a diversified portfolio in terms of liquid assets that could be easily converted into cash when required,” said Saket Dalmia, President, PHD Chamber of Commerce and Industry.
Dalmia explained the crisis could create “short-term panic”, especially for startups that had deposits with SVBs. Investor confidence and markets may fall for a while however the global economy consists of bigger and more resilient players as well.
Why is SVB not the next Lehman?
In addition to banking on a specific sector, SVB held more than 75 per cent of its investments in held-to-maturity (HTM) securities and invested aggressively at a time when interest rates were quite low during the pandemic.
“Fed interest rates shot up twice recently, leading to a fall in the prices of HTM securities. This scenario was made worse by falling depositors’ confidence. Given these, the crisis appears to be a result of unsystematic risk about a particular bank which ignited the sentiment of the bank run,” added Dalmia.
Comparisons have been made with the Lehman Brothers collapse but all indicators point to this not being the case. In September 2008, Lehman Brothers filed for bankruptcy as its Global Investment Bank was affected by the 2008 financial meltdown. At the time, Lehman was the fourth-largest investment bank in the US with around 25,000 employees globally.
"We have to understand that the underlying asset is the main point of difference. In the 2008 financial crisis, it was the subprime mortgage that was the problem whereas, in the SVB crisis, it was the HTM securities that were mismanaged by this particular bank. Lastly, with HSBC taking over SVB and with Federal Deposit Insurance Corporation (FDIC) assuring deposit insurance, the collapse is likely to be contained,” Dalmia added.
Impact on Indian businesses
“As SVB was primarily a major banker for the startups in the US, the startup ecosystem in India is also likely to be impacted adversely,” said the managing director of Resurgent India, Jyoti Prakash Gadia.
India’s startup ecosystem, as of date, is not highly dependent on foreign direct investment (FDI) investment considering the capital overhang of more than USD 7 billion parked currently with domestic venture capitalist (VC) funds for deployment and there is domestic liquidity which is helping to raise more funds for VCs.
The impact on Indian companies is limited to those that had holding companies or subsidiary companies in the US and were maintaining accounts with SVB. The ones that have exposure to SVB are small in number and larger in size. One example is Nazara Tech, which has Rs 60 crore stuck in one of the SVB subsidiaries.
“In the overall picture, we are not expecting any major impact and, even if there is any, it will be only short-term on the Indian startup ecosystem. Indian startups which have exposure to US markets are more likely to get impacted as US banks could face liquidity pressure for the next few months if there is a mismatch of assets and liability at their end,” explained the co-founder of Unlisted Assets, Manish Khanna.
The great rescue
One of the biggest, and possibly more important, takeaways from the SVB crisis was seen in the global efforts for protecting account holders and taxpayers’ monies whether, within the US, the UK’s quick action in HSBC buying out the SVB UK subsidiary or even how India is looking to assist companies in moving their funds to Indian shores.
The US government is moving swiftly to protect all depositors to prevent a chain reaction. The administration of Joe Biden has stated that all depositors will receive their money back and that nothing is at risk. However, there are still many moving parts at SVB, not just depositors' money, but also other loans and investments that they would have given out.
“This alleviates many concerns and is a good move by the US government. But whether this is a cause of concern for the banking and financial industry from an investor’s perspective is another matter. There will be some repercussions for investor confidence and the VC industry in the US, but there will be no overall economic slowdown,” added the founder and CIO, Prudent Equity, Siddharth Oberoi.
He added, “There will be some repercussions for investor confidence and the VC industry in the United States, but there will be no overall economic slowdown. That being said, there are still a lot of moving parts at SVB, not just depositors' money, but also other loans and investments that they would have given out. We will gradually learn what is going on behind the scenes.”
British Prime Minister Rishi Sunak said that he will always be on the side of entrepreneurs, innovators and young people inventing the future. “What really matters for economic success – is innovation. If we want our country to succeed, we need to do what we’ve always done and embrace new technologies and the people and culture that create them. No serious analysis of our prospects could conclude anything different," he added.
The union minister of state for skill development and entrepreneurship, Rajeev Chandrasekhar on Tuesday said that the Indian banking system is the most robust and stable and startups may explore using it. He said, "While startups have a natural incentive to use banks like SVB, we must figure out a way to use the Indian banking system without changing your business model.”
Chandrasekhar interacted with over 450 startups, owned or co-owned by Indians, venture capitalists (VCs), industry leaders and other stakeholders on the collapse of Silicon Valley Bank through virtually. He assured them that the government is laser-focused on helping them tide over this crisis.
All involved are working towards resolutions but the jury is still out on whether the global economic uncertainties will end with SVBs and Signature Banks or if another big development is around the corner adding to sleepless nights for investors, government leaders and businesses at large. Like the startup ecosystem, others too will need to show agility in taking future steps in the right direction. The emphasis has to not only be on strong fundamentals and the ability to pivot but also be prepared for different contingencies.
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