A Note on the Current Banking Crisis: An Indian Investor’s Viewpoint

It’s been a few weeks since the global banking system has been seeing one development after the other, most of them disheartening in nature. It’s been a rollercoaster of financial behemoths folding up and getting bought out in overnight deals.

It has led to significant erosion of shareholder wealth,loss of investor confidence, and a general rush towards removing funds from previously safe havens. This has led to a liquidity crunch and a drying up of investor funds in various places.

A round up of all that has occurred so far.

• Signature Bank and Silvergate Capital suffered due to their exposure to crypto firms, related asset classes and collapsed some time after the FTX scam.
• With $209 billion in total assets, $21 billion of which were in bonds yielding an average of 1.79%, Silicon Valley Bank was ranked as the 16th-largest bank in the US. However, due to its investments in the tech sector and its vulnerability to interest rate hikes, the bank incurred significant unrealized losses, resulting in a sharp decline in its stock price that caused alarm among venture capital firms. Eventually, a run on the bank was triggered, leading to its closure by California regulators.
• Credit Suisse Group AG’s problems started way back in 2021, with two major scandals rocking it in quick succession. The Greensill disclosure resulted in four funds with over $10 billion in assets being suspended, the resignation of several of its top executives, including its CEO and Chairman, and an internal review into its risk management practices and corporate governance framework.?

It was followed up by the Archegos Capital collapse,with $5.5 billion in assets gone overnight. It then faced a $600 million fine (fraud), $475 million settlement, and a number of other cash outflows as a result of independent enquiries by financial bodies in different geographies. All of this has resulted in over $100 billion in client assets imploding in Q4 2022, around $10 billion in deposit outflows daily, and an $8 billion loss in FY22.

The latest development came recently, with a deal being reached with UBS for a $3.2 billion buyout. Credit Suisse shares have plunged, its $17 billion worth of risky bonds in the Europe AT1 market now being termed as “worthless”.

What has all of this has resulted in, and what does it mean for Indian finance - both banking and investment wise?.

PE/VC funding in India

While the total exposure to Signature, Silvergate and SVB is minimal outside of a very select group (mostly tech startups and crypto orgs.), the rapid development has meant that investors in all kinds of markets are super-wary of investing and buying. It means that liquidity has mostly dried up.

It is being clearly felt by Indian startups. As of Feb 2023, PE/VC funding for Indian startups was a little more than one-fourth of Feb 2022 ($1.32 billion vs $4.77 billion). Over Nov and Dec of 2022, there was a 30% decline in funding being raised (corresponding to the timeline for the events listed above).?

What follows is a funding winter for Indian startups, as venture capital firms are keeping a tight lid on $12.9 billion worth of funds. It’s the highest the total corpus has been since 2017. However, this isn’t a war chest, make no mistake. Investors are looking to arrest outflows, consolidate losses and protect their remaining wealth. Nearly every deal looks risky, and every investor feels afraid. They are content to wait the current uncertainty out, which means that Indian startups have to be frugal and look for other sources of funding.

Credit Suisse and its impact on India’s banking sector.

The Credit Suisse story has some implications for the Indian banking sector, but it is less than feared. Analysts are concerned about the bank's significant presence in India's derivatives market. According to a note, overseas banks in India hold 4% to 6% of assets, but a hefty 50% share of off-balance sheet liabilities.

As per Jefferies India, Credit Suisse possesses over 200 billion rupees ($2.4 billion) in assets in India, making it the 12th largest offshore lender. Loans account for 73% of its total liabilities in the South Asian nation, with a short tenure. It is anticipated that the central bank of the country will monitor for liquidity issues and counterparty exposure and step in when required. The firm also predicts institutional deposits to move towards larger and quality banks in India.

Although foreign banks make up just 6% of banking assets, with Credit Suisse accounting for 1.5% of that share, the recent developments are predicted to have a "milder” impact on banking in India.

Conclusion

It is clear that the global banking sector is currently facing a challenging time with several significant events unfolding. However, amidst this crisis, the Indian banking system has shown remarkable resilience and stability. The current state of the banking systems in the US (and to a certain extent Europe) and India show a remarkable difference in outlook, and highlight why the Indian banking system is well-positioned to weather any financial crisis.

There are of course, certain bumps in the road that may be felt ahead, as highlighted above, but there are enough safeguards in place to stave any long term effects.?