SVB crisis tests India’s new finance hub potential

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The sudden failure of Silicon Valley Bank has put an up-and-coming financial centre in India out of business. India has been a small player in world finance for a long time, but it has a chance to become more important if it moves quickly to fix some regulatory problems.

Once they were able to access their SVB deposits again this week, many Indian startups rushed to open new bank accounts in Gujarat International Finance Tec-City, also known as GIFT city. Since the funds in accounts set up in the hub’s International Financial Services Center (IFSC) are held in U.S. dollars, they are not subject to India’s strict capital controls. And even though U.S. banks are having a hard time, accounts in GIFT city are still safe because they meet the Reserve Bank of India’s rules for capital adequacy.

Harshil Mathur, CEO of the fintech company Razorpay, which has been helping Indian startups move money out of SVB, thinks that at least $200 million have been moved to GIFT city bank accounts run by Indian banks in the past week.

Siddarth Pai, who is a founding partner at 3one4 Capital and a member of the Indian Private Equity & Venture Capital Association, said that after the SVB collapse, Indian startups are thinking twice about being based in the U.S.

The idea behind GIFT city, which has been in the works for more than a decade, was to try out a more open capital account, which has made it hard for India to take part in global financial markets, without risking large-scale, uncontrolled flows of money into and out of the country. The government wants it to be a financial centre for the whole world.

But its growth has been slow, even though there have been tax breaks and other incentives. According to government data, the GIFT city’s IFSC had $29.38 billion in assets at the end of March 2022. This was almost double the amount from the year before. But that still makes it a small fish compared to places like Singapore, which is in charge of trillions of dollars.

And there are a few things that make it hard for GIFT city to be a real alternative.

For one thing, most of the companies that had money at SVB are U.S.-based and either do a lot of business in the U.S. or are based there because their venture capital investors want a safe Delaware incorporation. That makes it easier for these investors to move money and smooths the way for a U.S. listing.

Another problem is that banks in the IFSC depend on SWIFT, which is a messaging system used by banks all over the world. It costs money and takes time to move money in and out of accounts. SWIFT also needs “know-your-customer” disclosures with six points. Moving money within the U.S., on the other hand, is much faster and cheaper.

India also didn’t set up a single financial regulator for the IFSC until April 2020. Before that, Indian regulators had different rules for banks, capital market products, and funds in the IFSC.

Lastly, the IFSC makes it easy to do business with people outside of India, but it is still hard to move money between it and the rest of India because the Indian rupee is only partially convertible. And with another global recession on the horizon, a currency that can be used everywhere is still a long way off.

With a general election coming up next year, politics could also play a role. The IFSC was started by the current Prime Minister, Narendra Modi.

For now, startups that are backed by venture capital may choose GIFT city accounts over other ways to send money to their Indian subsidiaries. But if New Delhi doesn’t move quickly to make transactions there easier and figure out a way to get VC investors on board, GIFT city’s unexpected gain from the SVB mess could be short-lived.

Source: Team CurrencyVeda