Editorial     

Published: Mar 31, 2023
Updated: Mar 31, 2023

Shock waves of US bank collapse

The sudden and unexpected collapse of Silicon Valley Bank and Signature Bank in the US has sent shivers down the spines of the financial industry, and has major implications for the broader market and economy. Though the Indian economy and markets cannot remain unaffected by such a huge failure, the impact will not be that severe, if experts are to be believed.

Silicon Valley Bank (SVB), which specialises in providing financing to technology and innovation start-ups, has been a crucial player in the Silicon Valley ecosystem for decades. Its collapse signals not only the failure of one institution but also highlights broader economic and structural issues facing the tech industry.

With borrowings being easy and cheap for new companies in the tech industry, they had substantial amounts of money to invest. Some of these companies chose to deposit their surplus funds in SVB, which in turn used the funds to purchase long-term debt instruments to earn more money as interest rates decreased, but without taking adequate protection measures. However, when the US Federal Reserve resorted to raising interest rates quickly in order to tame spiralling inflationary pressures, some depositors preferred to withdraw their funds. In order to return the money to the depositors, the bank had to sell its long-term investments at a loss, which resulted in SVB losing money. Along with this, depositors began withdrawing money for better use when rates began to rise. This loss made it more challenging for the bank to continue operating. This ultimately led to the collapse of the bank.

No doubt, the immediate impact of the collapse of SVB has been felt in the tech start-up space, with many young companies struggling to secure funding and access to capital. The bank’s loan portfolio, which includes many high-risk features, has been thrown into disarray, leaving many businesses without the financial support they need to survive and grow.

The wider implications of the collapse are more far-reaching. The bank’s failure is indicative of the growing financial instability within the tech sector. It is feared that the collapse of SVB could trigger a wider financial crisis in the tech industry as other lenders and investors realize their risky capital exposure to start-ups, leading to a slowdown in innovation and economic growth.

The bank’s collapse could also have a knock-on effect on the broader economy, as the tech sector has become a key driver of growth and employment in many regions, including India. If the tech industry experiences a contraction, this could have a ripple effect on the broader economy, including areas such as real estate, manufacturing and retail.

Of course, as far as India is concerned, there will be no major impact on the Indian banking sector. However, the tech industry here has emerged as a significant driver of growth and innovation in recent years. The Indian economy is home to many start-ups and tech companies that rely on financing and investment from institutions like SVB. If a major player in the tech financing sector were to collapse, this could have significant implications for the Indian tech industry and the broader economy.

In addition to these economic implications, SVB’s collapse also raises important questions about the role of financial institutions in fostering innovation and growth. As the tech industry has grown, it has become increasingly reliant on specialized lenders and investors such as SVB to provide the capital needed to fuel innovation and distribution. Thus, the collapse of SVB highlights the risks inherent in this model and raises important questions about how best to finance and support innovation in the future.

As far as India is concerned, it remains to be seen how far-reaching the implications of the SVB collapse will be on the Indian economy, besides the spectre of massive job cuts. In fact, SVB was a major lender to businesses operating in the US-India market. Thus, the bank’s failure raises concerns about the far-reaching consequences for these firms, forcing them to adopt drastic cost-cutting measures such as job cuts or hiring freezes.

The Indian financial system too could get impacted if exporters who are dependent on the US market start seeing a slowdown in their business. That in turn would impact job growth and their ability to be pay back their bank loans. A lot of venture capital investment coming into India would also slow down. But in the aftermath of the SVB episode, an immediate problem is that lending to start-ups would get severely restricted.