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Close shave in Silicon Valley Bank crisis

Silicon Valley Bank was the preferred place for many Indian startups to park their funds. The collapse of the bank on Friday triggered a temporary but nerve wracking crisis for these companies. Here's what happened, how and why.

Security guards let individuals enter the Silicon Valley Bank's headquarters in Santa Clara, California on Monday (March 13). (Photo: AP/PTI)

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Over 48 hours last week, after California-based Silicon Valley Bank (SVB) failed, hundreds of Indian startups with millions of dollars stuck in accounts at the bank went to the brink and back. Without the intervention of the United States government, these businesses were staring at mass layoffs and, in some cases, extinction. The crisis seems to have been averted — for now.

SVB’s collapse

SVB, which was founded in 1983, dealt with high-growth, high-risk businesses such as technology startups. The bank offered an easy way for startups in India, especially those in the Software as a Service (SaaS) sector who have a number of US clients, to park their cash — as they could set up accounts without a US Social Security Number or Income Tax Identification Number.

A very strong network of lawyers and accountants in the US actively recommended SVB for a fee to high-growth startups, the founder of an Indian startup told The Indian Express.

Basically, SVB dealt with businesses that banks traditionally avoided given the perceived risk of failure, and lent to startups when other sources of funding were hard to come by. “I’d say until a few years ago, it was only SVB; it is only now that startups have other funding options,” this founder said.

Based on the goodwill of having been there for these businesses when traditional banks stayed away, SVB received huge deposits during the tech boom of 2020-21. It invested the bulk of the proceeds in long-term US Treasury bonds while interest rates were low, and kept only a small volume of deposits on hand.

This strategy to earn returns worked until the Federal Reserve, the US central bank, started to raise interest rates last year to cool runaway inflation. At the same time, startup funding began drying up, which put pressure on many of the bank’s clients, who started to withdraw their money. To honour the requests, SVB was forced to sell some of its investments at a time when their value had declined, losing almost $2 billion in the process.

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That triggered mass withdrawal requests to the tune of $42 billion in a single day as depositors rushed to redeem their parked funds. But not everyone was successful.

Panic in India

The US government shut down the bank on Friday, and the Federal Deposit Insurance Corporation (FDIC) asked companies with accounts containing more than $250,000 to contact a toll-free number. For hundreds of Indian startups with a lot more than $250,000 in their SVB accounts, this was the beginning of a long wait — with no certainty how long it would take to recover their deposits.

“It is 4 am now and we have been on hold at the toll-free number given by the FDIC for over half an hour. We have around $2 million in our SVB account and need that to create the payroll,” a startup founder had told this paper early in the weekend.

It was obvious that not having access to that money would mean firing a large number of employees. The startup ecosystem was already going through a funding winter that had forced more and more businesses to dip into their savings.

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In a poll run on a WhatsApp group of Indian founders whose startups were incubated by the US-based technology startup accelerator YCombinator (YC), the majority said they had more than $250,000 with SVB, with some having parked more than $1 million in their accounts. SVB was also a preferred personal banker for several ultra high net-worth individuals in the technology space.

There was panic.

“I did not sleep for almost two days. I was constantly on calls with lawyers and accountants to figure out a way to save the company,” another founder said, requesting anonymity. His business had almost $3 million in its SVB account.

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Finally, relief

The insured amount of $250,000 was always going to be inconsequential. As of December 2022, SVB had $209 billion in total assets and about $175 billion in total deposits, 89 per cent of which was uninsured.

Depositors had to be helped in order to prevent a contagion effect from severely impacting America’s banking system. But given the learnings from the 2008 financial crisis, and the public sentiment around bank failures, a bailout would not have been unpopular.

Finally on Sunday night, a plan was revealed. Instead of a full government bailout that would have required taxpayer money, the Fed announced it would make available additional loans to eligible depository institutions to help assure that banks have the ability to meet the needs of all their depositors.

A new entity called the Bank Term Funding Program (BTFP) will offer loans of up to one year to banks, savings associations, credit unions, and other eligible institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasuries, agency debt, and mortgage-backed securities.

The Department of the Treasury will make available up to $25 billion from the Exchange Stabilisation Fund as a backstop for the BTFP. However, the Fed said it did not anticipate a need to draw on these backstop funds.

Thanks to the manoeuvre, Indian startups said they could manage to withdraw their money. The founder of YC-backed startup said the process of withdrawal was smooth, although wait times were long given the increased load on the bank’s servers.

A number of these firms are currently wiring their money from SVB to accounts in other US-based banks, given that SWIFT transfers — a secure and standardised method of sending or receiving money to/ from banks anywhere in the world — do not work for SVB accounts.

“We’re all just wiring to another US bank account and then deciding what to do. I’ve heard of other companies succeeding with wires. And we’ve so far had a great experience switching to Brex since we already had their credit card,” one of the founders quoted above said.

Govt steps in

On Tuesday, the Ministry of Electronics and Information Technology held a meeting with the affected startups to discuss the liquidity issues they were facing. In a submission to the Finance Ministry, the IT Ministry is likely to emphasise the need to devise a plan on how the Reserve Bank of India can get domestic banks to offer loans to these startups.

The IT Ministry is also expected to recommend exploring the option of startups being allowed to transfer money from their SVB accounts to Indian banks without facing taxation issues, and to urge the Finance Ministry to allow overseas branches of Indian banks to accept deposits from these startups.