Mudra Compass

The global economic crisis is looming around the world. The collapse of Silicon Valley Bank, the 16th largest bank in the United States has sent shudders around the world. The move of closing the SVB by U.S. banking regulators, putting the tech-heavy lender into receivership, moving quickly to protect depositors as a crisis rippled through global markets and hit banking stocks.

There are many speculations about the hit effect of SVB collapse in the Indian Banking System.

However, experts from different verticals are of positive opinion. “The collapse of SVB will not have any effect on the Indian banks as the Indian banking system is more insulated and regulated under the supervision of RBI,” said Kranthi Bathini, Equity strategist at WealthMills Securities.

However, the failure of U.S.-based SVB may only hit some Indian tech startups and IT firms for now. It is not even clear whether it will have ripple or contagion effects on more banks in the U.S. following this bank’s woes.

Silicon Valley Bank has over 37,000 small businesses with more than $250,000 in deposits, according to the data of the National Venture Capital Association (NVCA). The collapse will impact around 10,000 startups and may lay off 1,00,00 people.

The SVB lends to early-stage technology and biotech startups and manages the funds of venture capitalists. The SVB collapsed because they lend long term whereas, their deposits are short term. Therefore, they cannot call back long-term loans, and their short-term deposits have to paid on demand. As of now, there is no sign that it will impact India because we have a consumption-oriented economy. But, if the other countries face a recession, it will affect the Indian economy and growth rate.

The depositors of the failed SVB will have access to all their money, said in a joint statement by the U.S.-Treasury, Federal Reserve Board, and the Financial Deposit Insurance Corporation.

According to a report,  the 60 Indian startups have deposits in SVB bank which may be affected by the ongoing crisis of the bank. Therefore, the Indian Government has stated that the ongoing issue of SVB does not have any contagion to Indian startups or banks and is closely monitoring the situation.

Paytm founder Vijay Shekhar Sharma clarified that Silicon Valley Bank has completely exited its investment in One97 communication, and SVB is no longer a shareholder in Paytm.

SVB is the second-largest bank failure in the history of the US and the first such incident after the depression of 2008. The bank said, it had sold $21 billion of securities at a loss of $1.8 billion to ensure liquidity. Customers have withdrawn $40 billion – one–fifth of SVB’s deposits in just a few hours. It indicates that the digital era has sped up the collapse of the SVB Bank because most depositors have used mobile apps and phone calls to access their money in minutes instead of lining up in branches.

Industry experts have believed that SVB was exposed to only one community: the tech industry, venture capital, and startups. Social media has played a major role in communicating with each other so quickly that SVB became more vulnerable to rumors.

According to Jefferies, a global financial services company, “Indian banks are well placed in terms of quality of deposits and also the possible impact of mark-to-market losses on the held-to-maturity book. They further added, Indian banks have a much greater dependence on term and savings deposits even as retail deposits formed 55-60 percent of total deposits for private banks while the share was pegged at 67 percent for government-owned banks. Jefferies has a buy rating on most Indian banks including ICICI Bank, Axis Bank, Kotak Mahindra Bank, IndusInd Bank, Bandhan Bank, and State Bank of India, and also a buy rating on most non-banking financial companies (NBFCs) like Bajaj Finance, LIC Housing Finance, Piramal Enterprises, Cholamandalam Investment & Finance Company, Aptus Value Housing Finance India and Can Fin Homes among others.

When the failure of SVB and Signature Bank raises questions about the safety of depositors’ wealth globally, such failures are unlikely in the Indian system. The RBI has classified the State Bank of India, ICICI Bank, and HDFC Bank as Domestic Systemically Important Banks (D-SIBs), requiring them to earmark additional capital and provisions to safeguard their operations. This classification ensures that these banks are better equipped to handle any potential risks and are less likely to fail.

According to Financial Experts that the collapse of SVB and Signature Bank has limited impact in India, majorly impacting tech-startup and IT firms because they are mainly relied on foreign investments and may face capital raises due to the banking crisis. However, the impact on other sectors of the Indian economy is much lesser.

We cannot deny the contagious impact on the global economy that could constrict capital flow in India and other emerging markets. It could negatively impact the Indian economy and other economies that rely on capital inflows.

In a nutshell, the Indian banking industry and economy are stronger than ever. Hence, the U.S. banking collapse impact could be limited, but tech-startup and industries may face some challenges due to their foreign funding exposure. If the global economy faces a crisis due to the U.S. banking collapse, it may negatively impact the Indian economy.