US Bank Runs Could Hurt Indian IT Companies [UPSC Current Affairs]

The collapse of Silicon Valley Bank (SVB) and Signature Bank has raised concerns about the impact on the IT industry in India, which heavily relies on the US and European markets. In this article, we explore how bank failures in the US can affect the Indian IT industry and what can be done to mitigate its impact. This topic is relevant for the IAS exam economy segment.

Impact of US Bank Failures on Indian IT

The banking and financial services sector contributes over 30% of the revenue of Indian IT companies.

• Deals from the Banking, Financial Services, and Insurance (BFSI) and high-tech sectors may slow down due to the US bank run.
• The IT industry’s reliance on the US and Europe markets could create disruption.
• US and European firms may defer their IT spending and resort to cost-cutting measures, leading to a direct impact on the outsourcing business of Indian IT companies.
• The uncertain economic environment could affect the project pipeline and recruitment of Indian IT firms in the shorter term.

Dependency of Indian IT on the Western Countries

Source: Businessline

Reasons for recent bank runs in the USA: 

• The recent bank runs in the USA were triggered by the collapse of Silicon Valley Bank (SVB) and Signature Bank.
• SVB, in particular, attracted a lot of high-profile clients, especially start-ups, and put its assets in long-dated government bonds while its liabilities were demand deposits that start-ups could withdraw anytime.
• As the central bank in the US aggressively raised rates to fight inflation, the bonds held by SVB lost significant value, while the liabilities hardly budged.
• Customers, including venture capital investors, started to withdraw money in waves, leading to a liquidity crunch and a bank run.
• Liquidity issues also arise when loans and deposits have different maturities, which can lead banks to pay prohibitively high rates.

Way forward:

• Strengthen risk-management frameworks: Indian banks should strengthen their risk-management frameworks to identify, measure, and monitor risks. They should also have policies, procedures, and limits for risk management, contingency plans, and stress testing.
• Maintain sufficient liquidity: Banks in India should maintain sufficient liquidity to meet their obligations as they fall due. They are required to maintain a minimum liquidity-coverage ratio of 80%, and they should have a contingency plan to deal with liquidity crunches.
• Diversify client base: Indian IT companies should diversify their client base to reduce their reliance on the US and European markets. This will help mitigate the impact of any slowdown in these markets due to financial sector crises.
• Tighten risk supervision framework: The Reserve Bank of India (RBI) should tighten the risk supervision framework for banks and non-banking financial companies (NBFCs). This includes laying down board-approved policies for the role and responsibilities of the Chief Risk Officer (CRO) and ensuring that banks and NBFCs comply with them.
• Scrutinize banks’ balance sheets: Depositors should scrutinize the balance sheets of banks before depositing money to ensure that they have sound financial health and risk-management practices.
• Include asset quality in investment decisions: Investors looking to include banking stocks in their portfolio must not only take into account the market conditions but also the asset quality of the banks and their risk-management practices.
• Increase awareness: The RBI and other regulatory authorities should increase awareness among the general public about the importance of risk management and the potential risks associated with depositing money in banks. This will help depositors make informed decisions and reduce the likelihood of bank runs.

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