The collapse of Silicon Valley Bank (SVB) is certainly not a Lehman moment for the world, and the US Federal Reserve has moved swiftly to contain the contagion. But there are important lessons to be learnt. It is surprising that the US regulator didn’t keep a closer watch on lenders, especially their investment books, despite interest rates rising by about 450 basis points in a relatively short span of time. One hopes Fed will be more vigilant after the closure of Signature Bank and SVB. There could be a few banks that are still vulnerable to an implosion of this nature if depositors choose to pull out their money. Many could be holding low-interest bonds that have lost value, and therefore would incur steep losses if they liquidate these. For the moment, the crisis is under control and depositors at SVB, including those whose holdings exceed the $250,000 insurance limit, will be able to access their money from Monday. Moreover, a term-funding arrangement is being put in place, and HSBC will acquire SVB’s UK arm. The move by the Fed has reassured the start-up ecosystem, but regulators must be able to red-flag problems at other lenders. An obvious piece of advice for start-ups would be to not put all their eggs in one basket.
In the Indian context, the potential risks from the failure of SVB are negligible. As one analyst has pointed out, a subsidiary of SVB Financial Group was sold in 2015 and a rebranded version of that company has “good credit rating and stable liquidity.” Fortunately, just a couple of Indian start-ups had parked funds with SVB overseas. Nazara Technologies said two units indirectly related to the company held about $7.8 million in cash balances at SVB. To that extent, the impact on the start-up ecosystem is negligible. As for Indian banks, they have a paltry exposure to start-ups and their assets and liabilities are pretty well-matched. Moreover, their investments are largely in risk-free assets. Of the total investments by banks at the end of March 2022 of close to Rs 58 trillion, around Rs 48 trillion was parked in government securities. While there may be mark-to-market losses as interest rates have risen, these would be relatively small. Consequently, there is no question of savers pulling out their money, which account for the bulk of total deposits. To be sure, several Indian banks have failed in the past and have been bailed out by the government and regulator, mostly by getting a larger lender to acquire them.
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Even when it comes to corporate bonds, banks rarely subscribe to papers that are rated below AA-minus, sticking to strict prudential guidelines. Typically, it is the mutual funds that have been found wanting when it comes to investing in corporate bonds; the case of Templeton comes to mind immediately, but there have been other occasions when the MFs have sought forbearance from the regulator after companies defaulted. So far, Indian banks have pretty much steered clear of lending to start-ups, possibly because they typically look for fixed assets as collateral in the case of manufacturing units. The main assets that start-ups have are technology and people, and it is hard to see them as customers of banks in the forseeable future. Going by the practices in the start-up ecosystem—especially the innovative accounting practices—that might not be such a bad thing.