SVB Collapse: Should Indian Startups Keep Deposits In India? One of the good things about the Indian banking system is that the RBI is in control and uses its powers as needed, says an expert

The Silicon Valley Bank collapse has sparked many serious discussions and debates on what went wrong and how to avoid such a mishap in the future. Many financial experts have opined that while the fallout may have been a little extreme, a banking sector crisis has been in the making for a long time.

"Turmoil in the banking sector was set to occur long before Silicon Valley Bank (SVB) failed earlier this month," Kenneth Rogoff, former chief economist at the International Monetary Fund was quoted as saying.

Several Indian startups have been having sleepless nights ever since the news came out. Though the regulators have stepped in to support, this has made startups revisit their future business strategies. A dilemma that has arisen in the startup ecosystem is whether Indian tech companies should keep their deposits in India.

Managing deposits domestically vs internationally

"One of the good things about the Indian banking system is that the RBI is in control and uses its powers as needed. Startups should open accounts in the Gift City just as funds do. In fact, to my knowledge, many banks are already offering startups this facility. It is a positive shift towards controlling the entire situation. Keeping their deposits in India would ensure they keep only the required amount abroad, ensuring safety and insurance," said Gaurav VK Singhvi, co-founder, We Founder Circle.

"Focus on the domiciles - our banking system is very robust. When the startups decide to keep their deposits here, I am sure the government would implement policies and norms for their safety and protection," he added.

However, some do not agree with Singhvi. They say that it seems like an overkill to ask startups to hold deposits in India for the sake of it. Further, they also feel that there is no evidence of a systemic risk in the US banking system. "Banking services are similar to other services that a company needs. Specifically, one needs to consider their cash flow requirements, and the currency in which they receive, hold and spend cash. If a startup has received dollars in an offshore account and has significant expenditure lined up, say in the US, it would be the efficient option for them to keep those dollars in a bank outside India. Bringing the dollars into India, converting them and then reconverting them and sending them back – you are talking about any CFO's nightmares!!," said Nupur Garg, founder, Winpe.

Some experts also think that drawing a conclusion that startups should stick to India because of one mishap is hasty and doing so is a setback to the global ambitions and the vision of Indian founders to build from India for the world. "Looking inwards in the wake of the SVB fiasco is reactionary rather than rational. Most Series B+ startups raise mainly from funds domiciled outside the country and it will remain the case for the foreseeable future. This means that startups will have to get comfortable raising and managing funds internationally. This doesn't mean startups don't have control on how they manage risk," said ⁨Karteek Pulapaka, partner, Java Capital⁩.

Are there any lessons?

Having said that, most experts agree that there are indeed some lessons that startups can take from this fiasco.

"As far as bank deposits are concerned, It is about time startups diversified. I think the perceived reputation of banks has become a shortcut for startups to doing diligence and staying on top of developments. The next best thing to do would be to hedge if the startup founders don't have bandwidth to actively manage the treasury. Ideally, they would lean on their support systems in the ecosystem such as their investors, mentors etc to take stock of emerging weaknesses if any in the banking system from time to time," said Pulapaka.

He also thinks that if you are an Indian startup and have a parent company outside India, it is prudent to split the capital available between both locations with more capital close to your main geography for operations.

Another popular opinion, as mentioned above, is that it was difficult to foresee the SVB collapse. Thus one needs to adopt some of the conventional approaches like diversification and balancing your risks. "For example, avoid concentrating your banking relationships as that is like putting all your eggs in one basket. Look at having a Tier I bank in your relationships even if it offers slightly poorer terms than a smaller/regional bank. Think, what is the vulnerability of my exposure?" said Garg.

Experts feel that the current macroeconomic situation is a stark reminder of the chaos that's taken over the global economy. "All this necessitates a complete shift in thinking for startups; they need to rethink risks they don't even know they run. They already have a very tough job of creating a successful business, much less driving that startup to unicorn status. Broadly, given the rise in the frequency of black swan events, startups will have to expect and prepare for greater and more unpredictable risks and be ready to pivot when required," said Rajeev Suri, Managing Partner, Orios Venture Partners.

Having their banking in another country and being exposed to currency risks, inflationary pressures, interest rate instabilities, etc. is not a good idea in today's volatile times, he added.

Overall, VCs and experts watching the case closely feel that one should not blindly follow the herd and do your due diligence on the banking partners, be it anyone.

"Founders shall also reassess the fund requirements. Large funds in bank accounts definitely enable founders to focus on business growth but funders sometimes could not understand the difference between "Growth Funding" and "Loss Funding". A lot of times continued loss funding either becomes unviable resulting in business shut down or is extremely costly leaving too less for the founders to remain interested in growing the business further," said Sandeep Agrawal, director and co-founder, Teamlease Regtech.