Silicon Valley Bank Crisis: IT Ministry likely to seek domestic loans for start-ups

What’s in today’s article?

• Why in News?
• What is the Background behind MeitY’s move?
• News Summary Regarding Steps to Address the Liquidity Issues of Indian Start-ups

Why in News?

• To address the liquidity issues of Indian start-ups impacted by the fallout of the events at Silicon Valley Bank (SVB), the Union Ministry of Electronics and Information Technology (MeitY) is likely to devise a plan.

 What is the Background behind MeitY’s move?       

Image Caption: What is SVB?

• The California-based SVB, a cornerstone of the US technology and startup industries, recently failed, making it the biggest bank failure since the 2008 financial crisis.
• SVB worked with companies that traditional banks normally avoid due to the perceived danger of failure, and it lent to start-ups when it was difficult to find other sources of funding.

Image Caption: What led to the failure of SVB?

• A large number of Indian start-ups, especially in the SaaS (software as a service) sector that services US clients, had accounts at the bank.
• SVB had also been an important lender to several Indian start-ups when the sector in India was starting to take shape around 2010-11.
• Among its most notable fundings was an investment of a total of $1.7 million in One97 Communications, the parent company of Paytm.
• Deposits up to $250,000 are insured by the Federal government and anything above this is likely to be released in a phased manner.
• Many founders said that not being able to take out more than $250,000 from their accounts will hit them hard, as they used their SVB deposits for payroll and other operational functions and could lead to layoffs.
• Amid a funding winter, where availability of funds for start-ups is dwindling, this could also prove to be a major roadblock, especially to young businesses.

News Summary Regarding Steps to Address the Liquidity Issues of Indian Start-ups:

In a submission to the Finance Ministry, MeitY is likely to emphasise the need to devise a plan on how the Reserve Bank of India (RBI) can get domestic banks to offer loans to these start-ups.

The MeitY is expected to recommend exploring the option of start-ups being allowed to transfer money from their SVB accounts to Indian banks without facing any taxation issues under the Foreign Exchange Management Act (FEMA).

It also urged the Finance Ministry to allow overseas branches of Indian banks to accept deposits from these startups.

Q1) What is a funding winter?

Funding winter means an extended period of reduced capital inflows to startups. This has been a global phenomenon throughout 2022 and expected to have an extended run in 2023 as well.

Q2) What is Foreign Exchange Management Act (FEMA)?

It is an Act of the Parliament of India passed in 1999 to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

Source: Silicon Valley Bank crisis: IT Ministry likely to seek domestic loans for start-ups | IE

Video: https://www.youtube.com/watch?v=vEfnOPLa-Qs