Silicon Valley Bank Collapse: Know What Indian Bank Depositors Should Consider

It is important for investors to consider a few things to make sure their investments are safe rather than altering portfolio allocation due to uncertainty

The crisis in US banking sent shockwaves across the global financial system with many Indian startups coming under pressure over their exposure in the embattled Silicon Valley Bank (SVB) that collapsed after depositors pulled out as much as $42 billion on a single day, rendering it insolvent.

The US government stepped in to ensure that depositors had access to all their funds. Indian start-ups had deposits worth about $1 billion with SVB, said deputy IT minister Rajeev Chandrashekhar and suggested that local banks lend more to them going ahead. In response to the crisis, the Reserve Bank of India (RBI) said the Indian banking system remains stable and resilient. 

The banks' failure has raised concerns among depositors in India. In such a scenario, it is important for investors to consider a few things to make sure their investments are safe.

Know what to keep in mind

Ensure Proper Asset Allocation: It is important to stick to your desired allocation according to your risk appetite irrespective of market conditions. Financial planners suggest for instance if your desired asset allocation is 80 per cent in equities and 20 per cent in debt, the equity proportion may go up when the market performs well.  Investors need to ensure that the strategic asset allocation should not be altered due to recent challenges in the US and European banking sectors.  One should avoid shifting investments to debt just because of this uncertainty and should continue with their equity systematic investment plan (SIP) strategies.

Also, continue with the systematic investment plans (SIPs) because it provides the benefit of rupee cost averaging. It is because by pulling out of SIPs when markets are volatile you may lose out from being invested when the markets are recovering.

Avoid locking in money over Rs 5 lakh in small banks: Don't get lured by attractive fixed deposits as deposits in small banks may offer a higher rate of interest on more than Rs 5 lakh deposits. It is important to not invest in such deposits because if the bank goes bust, any amount of over Rs 5 lakh will not be covered under the Deposit Insurance and Credit Guarantee Corporation. 

If you have a much higher than Rs 5 lakh to deposit in banks, then it is ideal to spread your fixed deposits across a few banks. Put at least 60-70 percent in the RBI-identified systemically important banks.  These are the State Bank of India, ICICI Bank and HDFC Bank, suggest experts. The rest can be parked in other banks depending on the interest rates. Also, since the insurance limit is Rs 5 lakh per depositor, you can also try to put the money in the names of family members to use the Rs 5 lakh cover for each member instead of just one person.

Look At Debt Funds: You may want to consider debt funds as they are providing attractive yields and can provide good tax-effective returns in a three-year plus time horizon, suggests experts.  For conservative investors, long-term debt mutual funds may be a viable option at present, and a reversal of interest rate hikes is likely to occur sooner or later. If an investor has a horizon of more than three-four years, they can expect better returns than FDs.