Collapse of Silicon Valley Bank: An opportunity for IFSC, GIFT City?

However, just three days later, on March 10, 2023, SVB suffered a massive collapse, the brevity of which has been compared to the 2008 financial crisis. Since then, the twitter handle of SVB is no longer available. Another US bank — Signature has collapsed. HSBC UK Bank Plc. has announced plans to acquire SVB’s UK subsidiary, i.e.,SVB UK Limited and there have been various announcements by the regulators and authorities in the USA reassuring safety of SVB’s depositors and their deposits.

As the debate around the immediate impact of the failure of the second-largest bank collapse in the USA’s history continues, we examine its initial effect on the domestic institutions, especially on India’s maiden International Financial Services Centre (“IFSC”), situated in Gujarat International Finance Tec-City (“GIFT City”).

Initial Reactions
Several start-up founders have indicated that the reason for a lot of start-ups, even those without any significant customer or vendor presence in the US, to open accounts with SVB was the pressure from investors to have accounts with US banks while raising funds. This entailed setting up a company in the US, of which the Indian entity would become a wholly owned subsidiary.

As an obvious after-effect of the above, coupled with a global liquidity crunch and increasing interest rates, the Asian PE/VC and start-up market have been left with no choice but to look for an effective alternative. One such alternative can be to seek support from leading international financial centres (“IFC”) across the globe.

The Asia-Pacific region boasts of many leading IFCs in prominent economies such as Singapore, the UAE, Hongkong, and also India, i.e., IFSC, GIFT City. However, with the lag time in opening accounts in Singapore, taxation regime undergoing a change in UAE and the aversion of the China connection with Hong kong, India’s IFSC at GIFT City, with its light touch regulatory regime, is emerging as the best option to help navigate SVB’s affected depositors, especially the Indian startup and venture fund/ private equity players with India investments.

IFSC, GIFT City – a ready solution
IFSC, GIFT City houses many private and public sector banks as well as several global MNC banks, which have been in operation for a long time now. The core objective, as envisaged for IFSC in India, was to be a place of substance, rather than a mere tax haven. Accordingly, the regulator, i.e., the IFSC Authority (“IFSCA”), mandates that necessary personnel have requisite qualifications to be staffed by the IFSC Banking Units (“IBUs”). As a result, the IBUs not only have the necessary teams on ground, but over the past few years have garnered relevant experience for dealing in offshore markets and providing related financial services to the global diaspora.Thus, it comes as no surprise that many IBUs were taking advantage of this situation by setting up a taskforce to help the sector move their funds from US banks to IBUs at IFSC, GIFT City, thereby witnessing an unprecedented increase in their deposit growth.

Additionally, on the domestic front, India’s central bank, the Reserve Bank of India (RBI), infused liquidity of INR 82,650 crore into the banking system on March 10, 2023, via the 14-day Variable Rate Repo (“VRR”), borrowed by the Indian banks at a weighted average rate of 6.53%. While the Indian bankers and the regulators have dismissed any second order impact on the Indian economy as a result of SVB’s collapse, this infusion by RBI comes at an opportune time for India.

Opportunity Knocking
The SVB saga may be far from over and potentially be just the tip of the iceberg. In any case, from an IFSC perspective, one ponders whether the downfall of SVB and Signature Bank in the USA and the global liquidity crunch will finally bring the fintech, start-up, private equity and venture capital players (both global and Indian) to the IFSC jurisdiction. This may likely provide the much-needed boost in attracting global and Indian fintech as well as financial service players to the shores of IFSC, GIFT City and fulfilling the Indian dream of a full fledged global financial hub on Indian shores.

Ketaki Mehta is Partner – GIFT City and Jinisha Motwani is Associate at Cyril Amarchand Mangaldas

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)