Bangalore: Indian outsourcing firms nervously hope the US loan crisis does not deteriorate as the business of processing mortgages in their biggest market dries up and some clients keel over.
Firms such as iGate Global Solutions and WNS that serviced American mortgage lenders are already feeling the impact of the crisis, which a US survey this week called the biggest short-term threat to the world’s largest economy.
Technology budgets may be impacted
India’s outsourcing industry is now worrying about the crisis impact and a possible slowdown in the US economy on technology budgets of banking, financial services and insurance clients that farm out work to India to cut costs.
“The impact is now limited to individual companies that had a reasonable amount of mortgage servicing business,” said Kiran Karnik, president of the National Association of Software and Services Companies.
“We are hoping that it will blow over soon, but if the ripples travel to other areas of the US economy, it could be bad for the industry,” Karnik told AFP on 29August.
US mortgage business affected
Processing loan mortgages during the US housing boom was a profitable line of business for pure-play outsourcing firms that logged 47% growth to Rs 209 billion in revenue during the year to March.
The mortgage business has virtually dried up as US financial firms try to weather the subprime crisis, caused by defaults on loans made to home buyers with patchy credit histories, by staunching credit.
“In the US, sub-prime loan originations have almost ceased and consequentially the demand for origination services has dropped,” said N Ramachandran, CFO at iGate Global Solutions.
The company’s revenue from mortgage servicing fell to 7% of sales in the three months ended 30June from a peak of 10% in the previous quarter, he said.
“That said, these revenues continue to be at risk due to the ongoing subprime market turmoil,” Ramachandran said, adding iGate had assigned other duties to about 100 employees that used to process mortgages.
Subprime crisis hits IT industry hard
The outsourcing arm of Infosys Technologies, India’s second-biggest software maker, and iGate Global Solutions, both based in Bangalore, lost a major client when GreenPoint Mortgage was shut down by parent Capital One Financial Corp.
Mumbai-based outsourcer WNS said this month it expected to lose business from US mortgage firm First Magnus Financial, which had been expected to contribute 5% of its revenue in the nine months ending next March.
First Magnus has filed for bankruptcy, forcing WNS to assign other duties to about 500 staff, a press report said Wednesday.
Software firms such as Infosys are better protected from the US loan market turmoil than companies that earn revenue from back-office services such as transaction processing and risk management.
Any US slowdown would inevitably hit the entire IT industry, which earns two-thirds of its $50 billion in annual revenue from US.
“We have been speaking to our clients, economists and financial analysts every 15 days,” said Infosys chief executive officer Kris Gopalakrishnan.
“There have been concerns of a slowdown in the US economy for two quarters... but our clients do not anticipate an actual slowdown,” he said.
Opportunities exist within the slowdown phase too
Clients concerned about declining profits tend to initially cut costs, including on outsourcing, but will farm out more work over the “medium term” as they try to increase revenue, Gopalakrishnan said.
Some outsourcing companies scent an opportunity in the crisis. Quatrro BPO Solutions this month paid an undisclosed amount to acquire the mortgage processing business of US-based Preferred Financial Group.