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With the Silicon Valley Bank (SVB) crisis making headlines across the globe, I feel it is time I roll back the years, set aside my real estate headgear (temporarily) and use the banking bifocals. Time and again, the world has witnessed that whenever the US sneezes, everybody catches a cold.
A quick recap from my vantage point:
SVB – one of America’s largest banks – declared bankruptcy last week and this has taken the startup world by storm. The bank had a reputation for working largely with startups and 2020-21 saw massive deposits of around $175 billion from them due to the funding boom.
All banks engage in Asset-Liability Management - a strategic approach used by financial institutions to manage their assets and liabilities in order to minimize risk and maximize profitability. In SVB’s case, the surplus cash they had after issuing loans was invested in longer-term mortgage-backed securities. As the US central bank increased interest rates nine times in 2022 to fight inflation, the value of these securities nosedived.
Parallelly, startups were also cut on their VC funding and now made more frequent withdrawals on their deposited funds. This turned SVB into a ticking time bomb. Being short on cash, it was forced into selling its bond portfolio valued at $21 billion, at a whopping loss of $1.8 billion. The ill luck did not stop here – the bank tried to raise funds from the stock market but failed to convince investors. These two errors acted as panic alarms and startups began withdrawing their funds from SVB at an even faster rate.
Fast forward forty-four hours – the bank collapsed with its stock value falling over 60% in one day.
This is the largest banking collapse since the 2008 financial crisis. And that’s not all – what’s mind-blowing is that just 5 days prior to its collapse, Forbes had rated SVB as one of the best banks in America! This is just hilariously depressing.
While several media outlets have been analysing the impact of this fiasco on the Indian startup and financial ecosystem, there are a couple of salient takeaways that I’d like to share with you.
- Every successful bank needs to have strong asset-liability management. They should look to borrow long-term and lend short-term. In SVB’s case, their depositors were startups who cannot look foresee their survival beyond 12-24 months, and they lent to the very same entities at attractive terms. The SVB collapse simply comes down to asset-liability mismanagement by the bank, coupled with an unprecedented rise in interest rates by the US Fed, and a series of domino effects. However, the collapse that unfolded was dramatic-yet-predictable at the same time.
- The case of SVB has acted as a warning signal for all the other banks that have a high-risk portfolio. Banking failures cause havoc among the common public who then look to invest their funds in other streams. Trust is believed to be the penultimate factor of the banking sector and if mammoths like SVB can lose their depositors’ trust, other banking institutions should take it as a lesson.
- While this collapse may not seem to have a direct impact on the Indian economy, it can indirectly affect the lives of some people. Several India-based startups with headquarters in cities like Bangalore, Hyderabad, and Mumbai were in business with SVB, and with its collapse, they too are now at risk.
Diving deeper into the Indian realty context – I predict that this is an event with a neutral to net-positive impact on Indian real estate and residential home buying. The Indian real estate market has been on a rollercoaster ride in recent years, facing numerous challenges ranging from regulatory hurdles to a liquidity crunch. The COVID-19 pandemic further exacerbated the situation, leading to a slowdown in demand and project delays. However, the market has shown resilience and adaptability, with developers shifting focus to affordable housing.
The way I see it, there are a couple of scenarios that can play out:
- Like I said at the beginning of this newsletter – when the US sneezes, everyone catches a cold. With the domestic US economy feeling the brunt of the collapse, it’s reasonable to expect FIIs to slow down their investments in Indian markets, causing a ripple effect with prices for homes and other real estate stagnating. Additionally, if the startups find it difficult to survive, job losses may dampen the demand side of the market.
- The alternate scenario is that the failure of SVB puts doubt in people’s minds about their deposits in banks and increases their willingness to diversify their assets. In this case, real estate, gold and other forms of alternative investments – specifically tangible assets – should see demand increasing.
Even if scenario 1 plays out, I expect it to be a short-term jolt to the economy due to secular trends in favour of the India story. This is largely due to the fact that a large chunk of the Indian population is still buying homes for the first time. Moreover, a section of society now has a taste for luxury, and this phenomenon has taken over the market even more strongly after the COVID-19 pandemic. People experienced being locked up inside their homes for months, living in cramped spaces. They had to undergo these situations even though they could have afforded a more luxurious home. This is why seasoned home buyers now look for additional rooms, more open spaces outside the house, and a plethora of amenities at their disposal.
All in all, although the growth plans might be dampened for the coming months, the long-term future looks bright for Indian real estate, driven by factors such as the growing middle class, urbanization, and a favourable regulatory environment. That said, developers may need to focus on strengthening their asset-liability management practices to ensure sustainability and minimize risk in wake of the SVB collapse.
That brings an end to my two cents on the topic – please drop any feedback or questions in a reply to this email! See you next week!
Empower yourself with knowledge.
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