US Banking crisis sends shockwaves: Will the collapse impact India?

The recent rapid collapses of Silicon Valley Bank (SVB) and Signature Bank serve as a prime example of bank runs, where a large number of depositors withdraw their funds simultaneously. In response, US President Joe Biden has pledged to hold those responsible for the ongoing banking crisis accountable, especially in light of two major US bank failures occurring within a three-day span.

The failure is being described as the largest financial institution failure since the 2008 Washington Mutual collapse at the height of the financial crisis.

Martin Gruenberg, the chief of Federal Deposit Insurance Corp (FDIC) warned last week about a $620 billion risk lurking in the US financial system and by Sunday a major showdown of three banks happened, Silvergate capital Corp being the third to succumb.

The 40-year-old bank Silicon Valley Bank had $209 billion in total assets and about $175 billion in total deposits, as of December 2022. FDIC, in a press release, said that depositors will have access to their insured deposits — capped at $250,000 — by Monday (March 13). But the data submitted to the FDIC by the bank at the end of 2022 showed that 89 percent of its $175 billion in deposits were uninsured.

Following the failure of Silicon Valley Bank, Moody's Investors Service put First Republic Bank and five other US lenders under review for a downgrade. This is the most recent indication of concern regarding the stability of local financial institutions.

Bill Ackman, the veteran American investor, too has hinted that additional names could be added to the list of banks that are drowning in the disaster in the US. Many banks will be impacted by Silicon Valley Bank. Even with the United States Authority's action, many banks could still fail, according to Ackman.

The current US bank data shows that over $1trillion of bank deposits are currently uninsured, which creates doubt that the US banking crisis is not over yet. The US banking crisis set off turmoil in global markets, including in India. 

Impact of the crisis on India 

While finance ministry officials said that the ‘contagious effects’ of the banking collapse would be limited in India, affecting tech start-ups and IT firms. However, if the trouble spreads globally, it may constrict capital flow in India and other emerging markets. 

The tech industry remains the biggest customer of Silicon Valley Bank. A large number of Indian start-ups, particularly in the SaaS (software as a service) sector that services US clients have accounts at the bank.

Silicon Valley Bank had exposure to at least 21 startups in India, according to recent data from market intelligence platform Tracxn, though the amount invested in these startups is unknown. It was one of the first banks in the United States to accept account openings without a social security number (SSN) or a local address. As a result of these startup-centric schemes, it became the first-to-go location.

Another concern is about whether the banking crisis will have far-reaching consequences for these firms, forcing them to adopt drastic cost-cutting measures such as job cuts or hiring freezes.

Chief Economic Advisor V Anantha Nageswaran said, “Even if the global economy slows much more, India's external balances in FY24 will improve because of crude oil prices and is not expected to be a source of concern as the accretion to forex reserves has been to the tune of $50 bn in the last 3 months."

Moody’s Investors Service said the impact of the two US banks going down will be limited in India and other financial institutions in the APAC region. "Most APAC institutions are not exposed to the failed US banks, and only a handful of institutions have immaterial exposures. Finally, most institutions are not as susceptible to large losses from debt security holdings as Silicon Valley Bank was. The second-order impact of the US bank failures is still developing and bear close watching," it said. 

According to Moody's, Indian banks are unlikely to realize such losses because their funding and liquidity are strong enough to allow them to hold onto their held-to-maturity (HTM) securities.

Some market insiders have started noticing the silver lining in the dark clouds hovering over the US banking system. The biggest impact of the crisis could be that it might force the US Federal Reserve to end its rate hike cycle. Divam Sharma, Founder at Green Portfolio, is quoted saying, "Even a status quo will ensure a rally for equity investors as money will start flowing to equities and particularly to better-performing economies including India. A higher FPI flow will ensure a rally in the broader markets. We believe the rally will come sooner and will be massive as Fed halts the hike," he said.

The fear of a financial crisis sparked by the Silicon Valley Bank episode is leading to a drop in crude oil prices. Prathamesh Mallya of Angel One says, “Given the uncertainty surrounding the rate hike decision, coupled with inventories that are expected to remain high, crude prices are expected to remain under pressure.”

Meanwhile, the following the turbulence Reserve Bank of India is more willing to let the rupee weaken below a key psychological level, analysts said on Thursday. The rupee declined to 82.80 to the U.S. dollar on Thursday, its lowest in about two weeks.