SVB Failure Reason and its Impact on India's Overall Wellbeing.
In this article, you will learn what caused SVB to fail and how it can affect India and overall wellbeing of individuals.
Here, Rajiv Sharma, Editor of Wallet, briefly explains How SVB impacts India, and further discusses why we need to invest wisely.
Let’s Get Started
The whole world knows that SVB has collapsed. But here is the question, should we Indians be worried about SVB failure and its impact on us? The collapse of the Silicon Valley bank is the second largest bank collapse in the history of the United States of America after the failure of Washington Mutual in 2008. SVB was also one of America’s twenty largest commercial banks. The whole world is tense that it may lead to something like the 2008 financial crisis, which badly affected the mental health of specific subgroups. Stress, depression, and anxiety were expected consequences of any financial crisis.
But here is the thing, knowledge is power, and you barely know anything about Silicon Valley Bank
Let's dive right in
What is Silicon Valley Bank ?
Let's dig in
The bank was founded on October 17, 1983, and gradually went on to become the sixteenth largest bank in the land of the United States on its date of collapse, i.e. 10th march 2023. The enormous size of this commercial bank, founded by Bill Biggerstaff, Robert Medearis, and Roger Smith, is the main reason we are sharing the SVB failure. SVB was a commercial bank headquartered in Santa Clara, California. The bank was connected with a lot of tech startups all over the world. The bank’s total assets amounted to 209 billion dollars by the end of 2022.
What does Silicon Valley Bank do?
Let's dig a little deeper
After the news broke out that Silicon Valley bank had collapsed, many people had this question: what does Silicon valley bank do? The primary SVB target audience isn’t customers like us but various businesses and big corporations.
The bank provided services to 44% of venture-backed technology and healthcare firms that went public last year and half of all venture-backed businesses in the US. It’s essential to know the business model to understand Silicon Valley Bank.
The SVB provided some traditional banking services, but that was a tiny portion of this empire. The company also worked as an investing firm. They have invested directly in several VC firms. After that, they were also in the lending business. They provided money to a lot of firms on a debt basis. A lot of companies nowadays raise funds through this debt medium. Moreover, they helped companies in managing their wealth. Not only companies but also helped some high net-worth individuals with wealth management. Companies and individuals with a large amount of money became the main SVB customers.
Key Takeaway
SVB was a commercial bank mainly dealing with startups, VC funds, and high net-worth individuals with wealth management.
Why does SVB collapse ?
Here's the Truth
It is shocking that a company with 175 Billion dollars of deposits suddenly collapsed within a few hours.
What is worrisome is the start of funding winter worldwide, where startups are already running out of money, and now they have to stress about SVB collapse. Then how will a bank have money whose primary customers are these startups? Like every other bank, SVB also had invested money in different bonds, but because of getting short on cash, SVB was forced to sell its bond at huge losses and that created panic in the market about their condition. On the one hand, the fall of prices of different bonds due to a hike in interest rates by the federal reserve and, on the other hand, startups lacking cash both of these things caused these collapses.
As soon as the news came about the selling of bonds, a large number of depositors started withdrawing money at a very fast rate which made it impossible for the bank to operate. The US government acted swiftly to allay immediate fears of a widespread contagion by guaranteeing all deposits made by bank clients.
Several faults led to the bank’s failure, where the depositor base was concentrated, unlike other banks. More than 85% of SVB deposits were not insured. Moreover, the SVB client base are VC, tech Startups, and HNI.
As its primary customers were California-based tech startups and VCs who did not need cash, SVB invested approximately US$80 billion in mortgage-backed securities with an average yield of 1.56%. Its deposit flows witnessed huge volatility. In 2020 and 2021, startups were flush with funds, so the deposits grew by US$90 billion; there was a sharp drawdown, too, as startups faced funding constraints.
Everything was going well till US central bank started increasing the interest rates to tame inflation. As the central bank aggressively increased interest rates, yields of bonds increased rapidly. However, as SVB was holding longer-term mortgage securities with more than ten years to maturity, its value fell. Although the bank had chosen a safe bond product, it became a victim of interest rate risk (bonds fall in value when interest rates rise). These losses were still on paper, but the bank had to sell these bonds to service customers’ withdrawal requests when there were massive withdrawals. As the rumor spread, more and more withdrawals were requested, resulting in a bank collapse.
Key Takeaway
Funding winter, selling bonds in loss, and taking back deposits caused the downfall of SVB.
Impact of SVB Failure in India
So Let's get down to the business
But what is the impact of SVB Failure on India? There are speculations that the failure will impact the Indian startup ecosystem in the short term regarding payroll and funding, but this will not cause any significant harm in the long term. If more large banks fail in the US, and like in 2008 real estate sector faces the heat too, then the scenario can be very different and can impact Indian companies drastically as dollar inflows will squeeze.
Over 20 of the 40 YCombinator -backed Indian startups have deposits totalling over $1 million, with deposits varying from $250,000 to that amount. According to a YC WhatsApp survey, as reported by The Economic Times.
The government of India has also stepped into the issue. Union Minister Rajeev Chandrasekhar said he would meet the affected startups to understand the condition and determine how the government can help.
So even if the situation has been challenging for some various Indian startups, I have observed whenever the government is actively involved in such scenarios, they often have a solution to it. Now you really need to understand this, there was a time when SBI, one the most prominent banks of India, had lost investors’ trust in that Bank, but proactive government measures helped the State Bank of India to come out of it. But again, we have some depositors from Yes Banks as well, who lost money in Yes Bank Scam. Currently, Indian banks are in good health, thanks to several years of the cleanup in the Indian banking system. The Non-performing assets, which were at an alarming level in 2018 at 11.8%, are expected to fall to a decadal low of 4% by FY24.
So basically, the ball is in your court, and choose wisely where to invest and where to not. One of the safe ways for start-ups and individuals is to keep deposits in more than one bank with a good track record. Individuals should note that the Government of India only guarantees up to INR500,000 of deposits be it savings account or FD. Therefore for peaceful sleep, spread your deposits in several good banks as you never know another yes bank may be around the corner.
But in the case of SVB Bank, the Managing Authority of the company must certainly have gone through sleepless nights to study what exactly went wrong. Recently, even the Managing Director of the Company publicly published a post on LinkedIn that affirms that this is just a phase, which will pass, and they will emerge from it even stronger.
Key Takeaway
Funding winter, selling bonds in loss, and taking back deposits caused the downfall of SVB.
Final Thoughts
In a nutshell
See, there is a lesson to learn from any failure. As Zerodha founder Nitin Kamath quotes,
"
The lesson from SVB or Yes Bank in the Indian context is to have funds, especially working capital, distributed across a bunch of banks.
Nitin Kamath
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