For nearly 40 years, Silicon Valley Bank (SVB) grew with the tech industry, becoming a fixture of the tightknit community while serving both start-ups and their employees — eventually becoming the go-to bank for some of America’s most powerful and wealthy people.
Then, a week ago, it all came crashing down. Customers made a run on the bank, withdrawing $42 billion, after signs of financial weakness. The morning after, the government stepped in and closed it.
Meanwhile, in India, multiple Indian start-ups affected by the collapse of Silicon Valley Bank (SVB) started opening accounts with domestic banks having IFSC Banking Unit (IBU) in GIFT City to transfer their deposits from the US-based lender.
However, even as Indian banks appear seemingly safe from the global banking crisis that is currently unfolding, with major banks like Credit Suisse needing a rescue from the Swiss government, start-ups are not exactly flocking to deposit their money in them.
By reliable estimates, only about 20 per cent of the money Indian start-ups collectively had in their SVB accounts was brought back to banks at GIFT city. MoS, Electronics and IT, Rajeev Chandrasekhar, who held a meeting with more than 400 Indian start-ups after the SVB debacle, said that there was close to $1 billion that Indian start-ups had in their SVB accounts, of which only $200 million had been transferred back to India.
GIFT city has been conceptualised to be an international financial hub. It aims to be the financial and IT hub for the country. Fintech platforms have partnered with banks such as RBL, ICICI and Kotak to set up these US$ banks in GIFT City.
A number of start-ups, especially the larger ones, which had several million in their accounts, chose to move their money transferred to other US-based banks, Brex and Mercury, that are known to offer similar services as SVB. The latter, for instance, quickly created a new product called Vault which insured up to $5 million worth of deposits per account. That is significantly higher than the typical insured amount in most banks, which is around $250,000.
“We’re all just wiring to another US bank account and then deciding what to do. I’ve heard of other companies succeeding with wires. And we’ve so far had a great experience switching to Brex since we already had their credit card,” an Indian-start-up founder shared online.
The murmurs are getting clearer that start-ups were apprehensive about transferring their SVB money back to India because of the reliance of GIFT city banks on SWIFT, a wire transfer system used by banks globally. SWIFT transfers are known to be expensive and compliance heavy, requiring a six-point “know-your-customer” disclosure.
In what was a sprint race for businesses to withdraw as much of money as possible from their SVB accounts, a number of them did not want to be bogged down by time consuming compliance measures. Moving money within the US was a much faster and cheaper option.
Many sector analysts believe that start-ups are wary of moving their money to India as there is a lot of uncertainty around inconsistency in regulations.
“Also moving money out of India is becoming increasingly difficult. GIFT City is supposed to be for opening foreign accounts but I would just worry about what happens if things (regulations) just change. What if there is an increase in tax on LRS (liberalised remittance scheme)? As of today, it is okay that there is no tax on money being moved to Gift City, but what if they change it tomorrow,” said a start-up founder, requesting anonymity.
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