Global funds for Indian startups “may take a pause”: RBI tells Par Panel

The Reserve Bank of India (RBI) has informed a Parliamentary Panel that the availability of global funds for Indian startups “may take a pause” in the short run following the collapse of Silicon Valley Bank (SVB).

The apex bank, however, assured the standing committee on finance that the impact of SVB’s collapse appears to be limited on the Indian startup ecosystem.

The Parliamentary Standing Committee on Finance held a meeting with the top officials of the Ministry of Finance (Department of Financial Services), Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) on 3 April 2023. The members discussed how SVB’s collapse and the recent Credit Suisse crisis have affected Indian startups.

"Hearing of views of representatives of Indian Private Equity and Venture Capital Association (IVCA) on the subject 'Impact of crisis in certain Global Banks on India's startup ecosystem'," the notice for the meeting reads.

This Standing Committee for Finance was chaired by Bharatiya Janata Party (BJP) MP Jayant Sinha.

They panel was to also discuss global financial developments and how it impacts a country like India which is taking huge strides forward as a big player in promoting Startups.

This discussion comes at the back of the collapse of the start of focused lender SVB Financial Group.

This consultation aimed at addressing the situation and offer any assistance to members of India's innovation and startup ecosystem who had financial holdings in SVB.

Apart from the former MoS Finance, Jayant Sinha, the 31-member panel includes former union minister Ravi Shankar Prasad, former deputy chief minister of Bihar Sushil Modi, senior Congress leader P Chidambaram, former Union Minister Manish Tewari, former Law Minister Ravi Shankar Prasad, senior TMC MP Professor Sougata Roy, AAP, Rajya Sabha MP Raghav, Chadha, and BJD MP Amar Patnaik are among the list of members on this committee. 

Why Did The SVB Collapse?

On March 10th the Silicon Valley Bank (SVB), which had USD 212 billion of assets, failed, making it the biggest lender to collapse since the global financial crisis of 2007-09. 

The majority of Silicon Valley Bank's depositors were tech startups from the Bay Area, with account balances exceeding the USD 250,000 limit insured by the federal government. 

Their decision to withdraw their funds was reasonable, given the bank's large and unmitigated exposure to long-term bonds and its risky bet on interest rates remaining low. 

Unfortunately, this gamble backfired, resulting in the bank becoming insolvent or close to it.

Lot of Indian startups had their money parked in the high profile SVB. Almost 90% of India's SaaS (software-as-a-service) startups with a large customer base in the US, and also startups backed by Y Combinator (a renowned US startup accelerator), banked exclusively with SVB.

According to media reports, at least 21 start-ups in India had exposure to SVB, which had approximately USD 209 billion in assets and about USD 175.4 billion in total deposits as of December 31, 2022.

What Was Indian Govt’s Rescue Plan For Startups Amid SVB Crisis?

Over 450 startups owned or co-owned by Indians, venture capitalists, industry leaders, and other stakeholders interacted with Union Minister of State for Skill Development & Entrepreneurship and Electronics & IT, Rajeev Chandrasekhar, via video conferencing on March 13, 2023, to discuss the collapse of the bank. 

He acknowledged that while startups may be incentivized to use banks like SVB, it's crucial to figure out a way to use the Indian banking system without changing their business model.

Chandrasekhar also stated that for startups whose deposits were to be fully restored but have no access to them at present, the government would explore the option of making credit lines available in US dollars or Indian rupees. The Minister further pledged to make more credit products available to startups and streamline the process of transitioning from SVB to other Indian banks in the US.

Chandrasekhar encouraged startups to reach out to the CEO of the MeiTY Startup Hub for assistance with any problems or issues, assuring them that the government would do everything possible to help.

What Are The Lessons To Be Learnt From SVB Fallout? 

The collapse of Silicon Valley Bank has triggered numerous discussions and debates regarding the causes of the mishap and measures to prevent similar incidents in the future. 

The collapse of SVB has highlighted the need for robust risk management strategies and regulatory oversight to prevent such incidents from occurring in the future. Financial institutions must ensure that they do not engage in risky activities that could destabilize the financial system. Additionally, regulators must monitor and enforce compliance with regulations to protect depositors and investors from losses.

Overall, the SVB collapse has served as a wake-up call for the banking sector and highlighted the need for greater transparency, accountability, and vigilance to maintain the stability and integrity of the financial system.

According to some experts one positive aspect of the Indian banking system is that it is regulated by the Reserve Bank of India (RBI). They advise the startups to follow the example of funds and open accounts in the Gift City, an initiative that many banks are already offering.

By keeping their deposits in India, startups can benefit from policies and norms implemented by the government to ensure their safety and protection. This approach would enhance the stability and resilience of the Indian banking system, providing greater confidence to startups and investors alike.