India’s minister of state for IT said Thursday that hundreds of Indian startups had deposits worth about $1 billion in Silicon Valley Bank. He also suggested that local banks in India offer deposit-backed credit lines to Indian startups with their SVB accounts.
Tech companies tend to burn capital quickly and SVB was more willing to work with them than most other banks. But now that the bank is failing, many startup entrepreneurs are nervous about whether they’ll get their money back.
HSBC India Offers Foreign Currency Accounts to Indian Startups
India has been minting millionaires like never before, with local wealth managers hiring more staff and expanding in smaller cities to attract a rising number of new millionaires. But these foreign wealth managers have struggled to turn a profit on the business, and many are now looking to sell or close their India private banking units as they undertake a global restructuring.
The HSBC India private banking unit in Mumbai is closing, as the bank seeks to cut costs and concentrate its global operations. Its India business accounted for less than 5 percent of Asia’s $600 billion private banking business and posted pre-tax profit of $7 million in the six months to June, a source familiar with the matter said.
To reassure clients and make their lives easier, HSBC is offering them the chance to transfer some of their SVB-related funds into a non-resident Indian (NRO) or foreign currency account at the GIFT City in Gujarat. This account is intended to support overseas subsidiaries or joint ventures and is the HSBC India equivalent of an international bank branch in Mumbai, which offers similar services.
SVB’s Failure Could Have Ramifications for the Tech Ecosystem
Silicon Valley Bank, or SVB, was a key funding source for many Indian startups. It had a strong base of depositors in the Indian startup ecosystem.
The collapse of the bank has sent shock waves across India’s tech community. It may have a negative impact on the fundraising ability of several Indian startups that had raised funds from SVB.
This could lead to a cash crunch in the sector, as they may have to cut costs or lay off employees. This will be especially challenging for some of the more riskier venture-backed companies with deposits with SVB, according to CNBC.
The bank’s failure has also posed a serious challenge for the global technology industry as it is facing tightening funding conditions. This has been exacerbated by the Federal Reserve’s aggressive interest rate hikes, which have been taking a toll on investment capital and the technology stocks.
The FDIC’s Deposit Insurance Fund Will Make Every SVB Depositor Whole
In the event of a bank failure, the Federal Deposit Insurance Corporation (FDIC) pays insurance to depositors up to $250,000 per depositor for each account ownership category. This includes personal, business, and joint checking accounts; savings, money market, and certificates of deposit (CDs); and retirement deposits.
The FDIC is an independent government agency that is funded by premiums paid by banks and savings associations. These funds are deposited in the Federal Deposit Insurance Fund, which earns interest to supplement the FDIC’s premiums.
Historically, the FDIC has paid deposit insurance on the next business day following a bank failure. This typically happens by providing each depositor with a new account at another insured bank or issuing a check for the amount of their insured account at the failed bank.
As part of the resolution of SVB and Signature, the FDIC will make all depositors at these institutions whole. Shareholders and other unsecured creditors of SVB and Signature will not be protected by the resolution, and any losses to the Deposit Insurance Fund resulting from this Systemic Risk Determination will be recovered through a special assessment on the banks.
SVB’s Favorite Loans to Startups
Silicon Valley Bank had become the go-to bank for tech startups seeking banksers who understood their balance sheets and were willing to help them in a way that other bankers might not, according to investors and founders. Especially in the climate space, SVB had a solid reputation for helping startup founders secure lower-interest mortgages.
For that reason, many of the top Indian startups in the country have deposits of about $1 billion in SVB. But even after the government saved the lender Friday, some of them are preparing for delays in moving their funds while setting up accounts with other lenders.
One of the most popular types of loans SVB issued to startups was known as venture debt, which it often issued in addition to capital raised through private transactions with investors. This type of loan allowed startups to finance their growth without diluting their equity with a down round or going public.