it sector banking turmoil: Lessons from the past: what the IT sector can learn from 2008 crisis?

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The banking turmoil that’s hit North America and Europe over the past two weeks has got the Indian IT sector worried. But current and former industry executives say that the going is unlikely to get as tough for India’s tech companies as it was in FY2008-9 when the global financial crisis struck.

Over the past few weeks, the US has seen its second and third largest banking failures in history with Silicon Valley Bank and Signature Bank, both taken over by the Federal Depositors Insurance Corporation (FDIC). First Republic has been teetering, with JP Morgan heading talks on a rescue plan. Across the Atlantic, Swiss bank UBS has had to take over a failing Credit Suisse.

On Thursday, Software services behemoth Accenture said it will cut around 19,000 jobs giving in to macroeconomic concerns. It also lowered its annual revenue projections to 8-10% from 8-11% earlier.

The situation in 2008 was different as it was a structural issue, said V Balakrishnan, former CFO of Infosys.

“They went into a lot of new exotic structures products which were complex and when the market turned, many lenders did not have capital or liquidity and a lot of large banks went bankrupt and others survived with lots of support from governments,” he said. “I don’t think the current crisis is a structural issue for the financial sector globally. There are small banks which have mismanaged their treasury and are getting impacted. Large banks are relatively more stable and we are not going to see a Lehman Brothers kind of scenario.”

As for Credit Suisse, Balakrishnan said it is “an exception with a long history of mismanagement.”

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The banking, financial services and insurance (BFSI) segment dominates enterprise tech spend and offshore outsourcing, contributing an estimated 41% of industry revenue in this fiscal year through March, as per the National Association of Software and Service Companies (Nasscom).North America accounts for more than half of total revenue. Wipro has the highest revenue from BFSI at 35%, followed by TCS (31.5%), Infosys (29.3%) and HCLTech (20%), as of the third quarter of the current fiscal year.

Experts expect the revenue impact on IT services to be felt beyond the current quarter ending March and into the first quarter of the next fiscal year starting April as well. Analysts have also warned that the crisis may spill over from BFSI to other verticals such as retail and hi-tech in the latter part of FY24.

However, outsourcing advisor Pareekh Jain said that unlike the 4-5% impact on revenue in the 2008 crisis, the big IT companies are better placed to cope with the current troubles with less than 1% revenue impact.

Companies like Tata Consultancy Services (TCS), Infosys, Wipro, LTIMindtree, Cognizant and Mphasis are vendors to banks at the centre of the turmoil such as Silicon Valley Bank, Signature Bank and Credit Suisse. Exposure to regional banks in the US is the highest for Cognizant, followed by Infosys and TCS. Tech Mahindra and HCLTech have low exposure to US regional banks.

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Brokerage Kotak Institutional Equities said that TCS and Infosys are better positioned among tier-1 IT companies to tide over this situation. These two companies also have a higher chance of winning large deals in the cost-optimisation space, balancing out any impact from the crisis.

The brokerage added that surviving the current situation, and ensuring adequate liquidity and capital adequacy will emerge as the top focus for customers, leading to prudence on spending.

Wipro said the majority of its exposure is to large banks, which are well capitalised, but added that it is closely monitoring the situation in the US and Europe. Infosys and TCS didn’t respond to queries.

Mphasis chief executive and MD Nitin Rakesh said, “We have no business or exposure to Silicon Valley Bank, Signature Bank, or Silvergate Capital. Mphasis has deep expertise in the sector, and we will continue to partner with our clients to provide them the level of support needed to manage the current situation.” Silvergate’s closure was announced early March, laid low by its exposure to crypto assets.

An LTIMindtree spokesperson said it doesn’t see any harm from the banking industry’s troubles.

“We wish to share that given our limited exposure to the affected banking institutions, we do not expect any financial impact to be material for LTIMindtree. We will continue to work closely with our clients and monitor the developments on the ground,” the spokesperson said.

Cognizant does not have exposure to Silicon Valley Bank, Signature Bank or Credit Suisse as banking relationships, the company said. The details of Cognizant’s service relationships with its clients constitute confidential information, however, no single banking institution is material to Cognizant’s financial results, it added.

Industry veterans pointed out that the Indian IT industry had emerged stronger from the 2008 crisis. The Indian IT business process management (BPM) sector generated revenue of around $71.5 billion in FY09, according to Nasscom. That’s gone up to $245 billion.

A decade and half ago, the US market was also rife with anti-outsourcing sentiment while the Indian tech industry was dealing with its own governance crisis in the Satyam scandal. Indian IT industry growth nearly halved to 15.3% in FY09 from 28% in the year earlier.

“At that time, we supported the (IT) industry by talking to the customers to make sure they felt secure in the Satyam case,” said Ganesh Natarajan, former chief executive of Zensar Technologies and Nasscom chairman in 2008-9. “But in the subprime issue, it was more of reassuring the stock markets too that the Indian industry was wide and resilient enough that it would not collapse.”

Natarajan is currently chairman of consulting services firm 5F World.

As the world deals with the aftermath of the pandemic, war in Europe and inflationary pains, outsourcing is top of the agenda for most global technology leaders. Indian IT companies have cornered a premium share of the digital demand since the pandemic.

Experts said large banks are not showing signs of stress, unlike 2008. That crisis was caused by subprime lending. This one stems from the tightening of monetary policy as central banks try to rein in prices.
Regulators and governments have learnt the value of speed in tackling such situations, they said.

Som Mittal, president of NASSCOM during the 2008 crisis, agrees. “We could see governments across the world stepping in like in the case of UBS-Credit Suisse deal or First Republic Bank. A lot of swifter action is happening now than happened in 2008 which could limit the impact,” he said.

The sector is, however, well positioned to deal with the global crisis while we see slowing down of growth, he added

Balakrishnan, chairman of VC firm Exfinity Ventures, cautioned that there will be uncertainty as it’s not yet known whether the trouble could turn into a systemic issue with multiple stress points in the global economy. “BFSI sector may become cautious on spending as they have a more macro view of the economy than other sectors,” he said. “But we are nowhere near to the panic situation in 2008”.

Ganesh Natarajan of 5F said stringent third-party checks are needed to avoid risk if when working with non-Fortune 500 clients or smaller lenders.

“You have to do whatever third-party sources and checks that are available to make sure that your customer is solid. If your customer has a likelihood of having weak assets, the business could be impacted,” he said.

Companies that are dependent on BFSI should spread their risks.

“My advice would be for vendors who are still heavily reliant on the US banking segment in general to consider diversifying their portfolio before a repeat of 2008 happens,” said Hansa Iyengar, principal analyst at tech advisory firm Omdia. “BFSI has always been a rough vertical with constant budget squeezes–so nothing out of the ordinary.”
Is such diversification possible?

“What else can be done?” Balakrishnan said. “Financial services are the highest spenders on technology. Revenue growth follows the spending. They are consumer focussed and they need technology to service corporates and retail customers. They also need to keep upgrading legacy technologies to be more nimble. That proportion of revenues from the BFSI sector will not significantly change due to the current environment even though there will be a slowdown.”

Som Mittal said that pipeline of talent and freshers were the one of the top priorities then. “We worked with the academic institutions and IT companies who decided to honour the offers given but they staggered the joining over 6-8 quarters and worked with students to use the interim period to enhance their skills. If demand projections do look subdued in 2023, industry would build on the learnings of 2008 of managing campus recruits,” he added.

The government also stepped in and extended the corporate tax exemption by two years for software technology parks of India (STPIs) and special economic zones (SEZs) which was a “very significant” financial relief to tide over the crisis, Mittal added.

While the financial ecosystem is more resilient, countries are dealing with high inflation in the wake of pandemic-era quantum easing, said Arvind Thakur, former CEO of NIIT Technologies, now Coforge.

The larger sense of fear makes businesses vulnerable to economic shock, which should be tackled with an empathetic approach, he said.

“Use this opportunity to build-rock solid relationships with customers by understanding their pain points,” said Thakur.

During the 2008 crisis, the company had accommodated lower billing rates, taken compensation cuts across the leadership and increased stock options for employees to make everyone a stakeholder in the recovery process. Even the employees who took pay cuts were given the scope to recover those losses by achieving additional business targets.

“Our biggest learning from the past crisis is that it passes. And when there is economic recovery, you emerge with strong relationships that aid wealth creation across the ecosystem,” said Thakur.



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