Silicon Valley Bank ‘contagion’ may leave India unscathed, say Finance Ministry

Subject : Economy

Section: External Sector

Concept :

As the fallout from the collapse of Silicon Valley Bank is starting to spread around the world, experts say the Indian banking system is unlikely to witness any major spillover effects. However, there will be some impact on the sentiment of the market.
Silicon Valley Bank’s downfall is the largest failure of a financial institution since Washington Mutual collapsed at the height of the financial crisis more than a decade ago.

About Silicon Valley Bank

Silicon Valley Bank (SVB) was a commercial bank headquartered in Santa Clara, California.
SVB was the 16th-largest bank in the United States at the time of its failure on March 10, 2023, and was the largest bank by deposits in Silicon Valley.
As a state-chartered bank, it was regulated by the California Department of Financial Protection and Innovation (DFPI) and was a member of the Federal Reserve System. The bank operated from offices in 13 countries and regions.

What went wrong at SVB?

The financial institution best known for its relationships with high-flying world technology startups and venture capital experienced a bank run.
A bank run, which is typically the result of panic (customers withdraw their deposits simultaneously) rather than true insolvency, pushes a bank into actual insolvency.
Bank runs have occurred throughout history including during the Great Depression and the 2008-09 financial crisis.

Implications

The SVB’s large deposits (startups and wealthy tech workers) are unsafe.
The Federal government insures deposits to $250,000 and anything above it is considered uninsured and likely to be released in an orderly process.
But many businesses want to access funds to meet payroll and office expenses → could lead to furloughs/layoffs.
There’s no buyer of SVB.

Is this a sign of a repeat of the 2008 global financial crisis?

SVB was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies.
Other banks are far more diversified across multiple industries, customer bases and geographies and could survive a deep recession and a significant rise in unemployment.
However, if the ‘contagion effects’ from SVB or higher interest rates hit more foreign banks, a flight to safety among global investors could hit capital flows into emerging markets.
The contagion effect explains the possibility of the spread of economic crisis or boom across countries or regions.
The fundamental underlying this scenario where price movements in one market are resultant of shocks or volatility in the other market is a perfect information flow.

Impact on the Indian economy

Many Indian start-ups [especially in the SaaS (software as a service) sector] not only have accounts, but the bank had also been an important lender.
For example, an investment of a total of $1.7 million in One97 Communications, the parent company of Paytm.
As the funding for start-ups is dwindling, this could prove to be a major roadblock, especially for young businesses.