Silicon Valley Bank Crisis: How it is impacting Indian Start-Ups and is it a next financial crisis?
Last weekend didn’t go well for some investors as the Silicon Valley Bank Crisis with astounding speed on Friday. And now, investors are on edge over whether this downfall could spark a broader banking meltdown.
However, the United States federal government has stepped in to guarantee customer deposits, and to seize Silicon Valley Bank’s assets, which have been transferred to a new entity but SVB’s (Silicon Valley Bank) downfall continues to reverberate across global financial markets.
The bank’s collapse was the second-biggest bank failure in United States history, after the collapse of Washington Mutual in 2008.
Following this, the government also shut down Signature Bank (regional bank) which was teetering on the brink of collapse and guaranteed its deposits.
In a sign of how seriously officials are taking the SVB failure, the President of the United States Joe Biden on Monday told Americans that they “can rest assured that our banking system is safe,” and added, “We will do whatever is needed on top of all this.”
ABOUT SILICON VALLEY BANK
Just before collapsing, Silicon Valley Bank was the 16th-largest bank in the United States. The bank, with its base in Santa Clara, California, had 209 U$ billion in total assets, according to the U.S. Federal Deposit Insurance Corporation.
Established in 1983, Silicon Valley Bank provided banking services to nearly half of all United States venture-backed technology and life science companies.
It has operations in Canada, Germany, Ireland, Denmark, Sweden, Israel, the United Kingdom and China.
WHO USED THE BANK?
As you may expect from its name, the bank evidently catered to tech firms (technology sector), along with the healthcare sector.
HOW DID THEY GET INTO TROUBLE?
In a nutshell, to put Silicon Valley Bank’s (SVB) current situation, there was an attempt to increase the capital that went terribly wrong as the Santa Clara, California-based bank’s stock took a plunge in the market on Friday. The bank was also a key lender to technology start-ups and its shares fell by over 60% as investors moved to withdraw their deposits from the bank.
Faced with less ability to increase new capital, some of the bank’s customers in order to meet their obligations had to tap into their deposits. At the same time, the bank was using those deposits to invest in bonds.
HOW CRITICAL IS THIS?
The technology sector has been already going through a tough and challenging phase troubled by layoffs, falling revenues and economic uncertainties where investors are more concerned about an impending recession.
Not only this, but it has also made investors sceptical as funding for start-ups has fallen considerably.
The tech sector had not even recovered when the SVB situation happened, and if it gets worse, it will certainly push the recovery even further.
HOW SVB’S COLLAPSE IS CAUSING CHAOS IN INDIA
The bank was a huge deal for the startups and popular among Indian founders who wanted US accounts. However, many have struggled to get their money out.
The collapse of the California-based bank has reverberated across India’s tech sector as it has provided banking services to over 2,500 venture capital firms and roughly half of the (venture capital) VC-backed companies in the United States which includes many Indian companies with US venture capital funding, and much of India’s $13 billion software-as-a-service industry, which caters American clients.
Indian officials have tried to calm investors about any potential contagion in the nation’s banking industry and said they were planning a meeting with representatives from India’s start-up community in the coming days to understand the impact on them.
It has a global catastrophe impact, where a serious number of jobs are at risk. Even from small towns in India that have never heard of San Francisco, multiple startups are still remote in India and those jobs are at serious risk because industries are running out of money.
However, it isn’t clear how many Indian founders were banked by SVB, but it’s likely to be in the hundreds.
According to local media, it has been found that around 60 Indian startups backed by Y Combinator have deposits of over $250,000 each trapped in SVB.
Among Indian technology companies (publicly listed), is gaming firm Nazara Tech which reported to the bourses that it has $7.75 million which is around 11% of its cash stuck in SVB (Silicon Valley Bank).
Also, according to some experts, in the case of India, the number of Indian startups that have been impacted is extremely high compared to other nations, except for the US, but the capital would not be as much.
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