Hi everyone,

Welcome to this very special edition of The Pattern! It’s number #52 - a whole year of coming to you with the very latest in finance, technology, and economy! It’s been an action-packed year, and I’m sure the next 52 weeks will be no different!

On that note, let’s dive right into it. Last week, our CEO Rajat Deshpande wrote about concentration risk in financial services, citing the example of the run on Silicon Valley Bank and its subsequent downfall.

I’ve been following this development quite closely, and I’m especially intrigued about what this means for the Indian banking industry and startup ecosystem.

Surprisingly, it means more than one might think.

If it seems too good to be true, it probably is

Indian startups have a whopping USD 1 billion worth of deposits in SVB - and in the face of the latter’s failure, the Indian and US governments are scrambling to ensure that deposits reach their rightful owners.

Now, the obvious question may be, why have Indian startups chosen to deposit their money in an American bank?

The answer is simple.

Most of these startups work in the SaaS space, and the USA is one of their major markets. SVB in particular, allows such startups that don’t have employees or offices in the country, to open accounts without having to jump through too many regulatory hoops. What’s more, the bank has even provided equity and debt funding to these startups.

As a result of SVB’s collapse, Indian startups have already withdrawn USD 300 mn, since President Biden allowed withdrawals from March 13.

A lot of this money has gone into GIFT City banks, the global financial and technology hub that enables quick fund transfers and offers the option of opening US$ accounts with local bank branches.

Lessons to be learnt

While it looks like Indian startups will be cushioned from severe impact this time around, they'd be foolhardy to not learn some tough lessons going forward.

For starters, and most obviously, putting all your money in one place can be a serious gamble. Deposits that are caught in a bank failure are only insured up to a certain amount, so companies would do well to diversify their exposure across different banks, so every deposit is fully insured.

There’s also a case to be made for startups storing larger amounts of money in the Indian banking system. According to  Rajeev Chandrasekhar, Minister of State for Electronics and Information Technology:

“I think at the end of the day, there was a tendency for us historically to look at the American financial sector as the gold standard. Turns out it’s not. The Indian banking system and the Indian financial sector are more resilient and stronger, and it should be the preferred banking partner for startups,"

Banks too need to think long and hard about their attitudes towards startups. While some banks have opened startup-focused divisions, overall the perception remains that they can’t - or won’t - offer the kind of financial products that new-age companies need.

Once again then we come back to the need for traditional banks to modernise their processes and become more flexible in the face of changing individual and business needs. It’s a two-way street - startups need banks, and banks need to adapt and cater to their needs to survive in a digital economy.

The biggest lesson?

Silicon Valley Bank was close to 40 years old. Yet, all it took was essentially one day for it to completely fall apart.  Clearly, no one is bulletproof - and it's best to operate under that assumption when doing business.

Between the digits

• USD 42 bn: The amount depositors withdrew from SVB in one day

• 40: The number of Indian startups that have deposits worth between USD 250,000 and 1 million with SVB

• 6%: The rate at which India’s GDP is expected to grow in FY24

• INR 20,700 crore: The amount crisis-hit Credit Suisse owns in assets in India

Reading recommendations:

• RBI keeps close watch on Credit Suisse crisis

• Why India need not worry about Silicon Valley Bank’s collapse, but must learn from it

• Here’s how US banking crisis will impact India; key things to know

• Funding woes remain for Indian fintechs despite revival of big bets

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues.

Cheers, 

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.