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SVB and Indian Banks 💰

SVC Bank (The Shamrao Vithal Co-operative Bank) issued a press release on Saturday saying it is completely unrelated to SVB (Silicon Valley Bank) - lol. SVC seems to have had its day in the sun, while SVB got locked in the dark.

Overdosing on all the chatter around SVB? Read on for a crisp roundup if you’re someone who’s built a blind spot on it. After all, the bank added to the bad news and negative sentiment. The week was pretty brutal with the Nifty falling 2%, Nasdaq down 4% and Hang Seng down 6%.

Crisp + Insightful stuff on SVB:

Who is SVB?

Silicon Valley Bank has been the go-to bank for the tech industry in the US. Half of all VC-backed companies were customers of SVB. The bank’s deposits had gone 3x between 2018 and 2021 with start-ups getting funded, and depositing their cash into the bank.

What happened?

The 40-year-old bank is no more! The sequence of events was pretty simple:

  • SVB had parked an unusually high amount of money in bonds and mortgage-backed securities

  • With the funding winter in full swing, start-ups were withdrawing cash fast, and SVB’s deposits had been shrinking. To meet withdrawal requirements, it had to sell its bonds / MBS at a loss. It reported having sold some of its assets at a US$ 2 billion loss

  • Investors and depositors started freaking out and VCs advised their portfolio companies to pull out their money, resulting in a bank run. The stock fell 60% and sent jitters across the markets

  • The regulator - FDIC (Federal Deposit Insurance Corporation) stepped in and took control of deposits. FDIC is the DICGC of the US. It guarantees each account to receive US$ 250,000 when things go south

What is the impact?

  • The good news: SVB is a relatively smaller bank in the US. It has about US$ 200 billion in assets, compared to some of the larger banks like JP Morgan Chase which are at more than US$ 3 trillion. Moreover, banks now are in much better shape compared to what they were during GFC. SVB’s crash isn’t likely to cause a full system meltdown.

  • The bad news: Start-ups have already been strapped for cash. With their money inaccessible, they will feel the heat. They will either start cutting costs (more layoffs), shut down, or access other sources of funding resulting in a further liquidity crunch in the market. Eventually, VCs can become stressed too.

Why should I care?

You shouldn’t care much as of now. The event is specific to the US, the bank isn’t big enough to cause a system-wide failure, and the industry impacted (US start-ups) is far from impacting the Indian markets.

That said, the core factor causing it is a rise in rates! Fears of others falling, or being forced to sell assets at a loss are likely to result in a sentiment downturn, especially for more entities that are more vulnerable. The event will definitely raise the level of caution in global markets.

Additionally, the markets will start differentiating between good and bad practices (or even high and low risk) to a larger extent, and the valuation disparity between companies may end up increasing.

What about the impact on India?

A lot of the Indian start-ups that are funded in the US, like those that are backed by Y-Combinator may see an impact because of frozen flows. But that doesn’t impact the Indian listed space.

Banks in India can irrationally take a beating, and any dramatic fall resulting from this event in Indian banks can be used as a buying opportunity. After all, SVC and SVB are different!

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