Indian startups with millions of dollars stuck in Silicon Valley Bank weighing en masse withdrawal

Courtesy a manoeuvre of the US government on Sunday night, businesses with accounts at Silicon Valley Bank (SVB) will have full access to their deposits, unlike a previous measure where only an insured amount of $250,000 would have been immediately accessible. As of December 2022, SVB had $209 billion in total assets and about $175 billion in total deposits.

Buyer for UK operations

Even as the US government scrambles to find a buyer for the bank, SVB’s UK arm was sold to HSBC for £1, the Bank of England and the British government announced Monday morning. Sheila Bair, former chairperson of the US Federal Deposit Insurance Corporation (FDIC) – which took over the bank after it was shut down –told the US press that finding a buyer for SVB was “the best outcome.”

US Treasury Secretary Janet Yellen said that a government bailout of the bank — as the government took the approach of offering a loan to the banking industry in the US — was out of the question and that regulators were considering a wide range of options for SVB, including acquisitions.

While the US government has announced that it will put a backstop measure so that depositors can access all their funds at the bank, a founder whose startup is backed by the US-based technology accelerator YCombinator (YC), when asked if he would pull all his firm’s money from SVB, said it will do so if the US government is unable to find an entity that would acquire SVB.

“Not a 100 per cent sure what is the best course of action right now since the US Fed has put its statement out, but there is no clear buyer for the operations. If there isn’t a buyer, we’ll just move everything… we will take a call later this evening,” the founder said.

India impact

While the British arm of SVB has managed to find a buyer in the UK, that is unlikely to calm Indian startups since they primarily have deposited their money with the US-based SVB, which is headquartered in New York.

The fallout of SVB’s collapse could be far-reaching. Startups may be unable to pay employees in the coming days and venture capital firms may be unable to raise funds. The tech industry is the biggest customer of SVB with a large number of Indian startups, especially in the SaaS (software as a service) sector that services US clients, having accounts at the bank.

Additional loans

Instead of a total government bailout that would have required taxpayer money, the United States’ Federal Reserve announced late Sunday night that 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 be created and it will offer loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository 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 Federal Reserve said it did not anticipate that it would be necessary to draw on these backstop funds.

The Indian Express has reported on how the collapse of Silicon Valley Bank (SVB) sent shockwaves across the Indian startup community given that a number of them are customers of the bank. Rajeev Chandrasekhar, minister of state for electronics and information technology, told the paper Sunday that he would meet some Indian startups affected by the SVB collapse to figure out how the government can help them.

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

Crisis at the bank began after it sold substantially all of its available-for-sale securities at a $1.8-billion loss, mostly in the form of US Treasury securities.

SVB received a massive volume of deposits during the 2020-2021 tech boom and invested the proceeds into long-term Treasury bonds while interest rates were low. However, with interest rates rising in the US, the market value of these Treasuries became substantially lower than SVB paid, triggering withdrawal requests from depositors.

While the bank’s 52-week high was just shy of $600 per share, it was trading for less than $40 in Friday’s premarket session.