Subprime woes not to hit IT firms

A majority of Indian information technology service providers will not be hit by the US subprime lending crisis that has had a cascading effect on the global stock markets.

This, despite the fact that they have anywhere between 24 and 47 per cent of their revenues coming from the banking, financial services and insurance segment -- most of this from the US.

The BFSI segment, for instance, currently accounts for 43 per cent of the total revenues of India's largest IT services provider, Tata Consultancy Services.

However, a TCS spokesperson clarifies: "We have no exposure to subprime lending and hence do not foresee any impact on our revenues from the BFSI vertical." Likewise, Girish S Paranjpe, President of Finance Solutions Division, Wipro Technologies, reasons: "Our exposure to the subprime market is less than 1 per cent."

"HCL's exposure to the US mortgage industry is mainly with the banks with mortgage lending operations (not with pure-play mortgage lenders which specialise in all kinds of mortgages including sub-prime and Alt-A). To that extent, there is no significant impact," explains an HCL Technologies spokesperson.

However, a mid-sized vendor like i-Gate had an approximately 10 per cent exposure to subprime at the start of the calendar year 2007, and, hence, the company could take a hit in revenues.

Subprime lending is restricted to the mortgage market, and the true extent of its effect is not really known, notes Siddharth Pai, a partner at outsourcing consultancy firm TPI and MD of its Indian Operations.

In fact, he adds, IT firms may eventually benefit as banks (that are affected by the sub-prime lending) offshore more work to them in a bid to contain costs. This view is corroborated by Pradeep Udhas, global head (sourcing advisory), KPMG.

Pradeep notes, however, that "Indian business process outsourcing firms that provide services to mortgage firms could be affected".

The Raman Roy-founded Quatrro BPO Solutions, for instance, recently announced the acquisition of mortgage loan processing operations and platform of US-based Preferred Financial Group. The acquisition is expected to allow the Indian major to provide quality service at a price point projected to be 30 per cent to 50 per cent lower than current processing costs in the US.

The residential mortgage industry in the US is estimated to be about $2 trillion. With increasing interest rates, mortgage lending institutions have been checking on costs to optimise performance. IT-BPO firms offer end-to-end mortgage origination services and also professionally manage the mortgage servicing activities.

A research report titled "BPO Opportunities in the US Residential Mortgage Market" by the Trinity Business Process Management and Avendus Advisors indicates that the offshore addressable BPO market size for the US residential mortgage ecosystem is in the range of $6 billion to $7.4 billion. The existing mortgage-processing BPO market in India is approximately $150 million.

"Any conclusions at this stage would be premature. Financial services are a complex space with a broad medley of segments. Many vendors do not break out revenues between banking, insurance and capital markets, for instance," cautions a new CLSA India report. It's a wait-and-watch game till then