US banking crisis set to hit Indian IT hard

Bengaluru: The fall of Silicon Valley Bank (SVB) and Signature Bank is likely to make US-based banks cautious on future spending, which may slow down growth in other segments of the banking sector apart from the current mortgage and investment banking segments.

Sources in the know said the ongoing crisis doesn’t bode well for Indian IT services firms which count major banks in the US as their clients. Many of Indian firms have already been impacted owing to growth moderation in mortgage and investment banking segments.

“This situation is still evolving. But if the current crisis has a contagious effect, American banks are likely to cut technology spending in coming quarters,” said an official of a mid-tier IT firm who wished not to be quoted.

Due to hike of interest rate by the US Federal Reserve, home loan rates have increased significantly. Therefore, IT services companies have seen dip in growth in the mortgage segment of their BFSI (banking, financial services & insurance) vertical.

Mid-tier IT firm Mphasis’ top line was negatively impacted during the third quarter owing to slow growth in this segment. Similarly, performance of investment banking segment has also lagged in recent quarters. All major IT firms including Tata Consultancy Services (TCS), Infosys, HCL Tech, Wipro and others have flagged uncertain growth prospects in these two segments.

Analysts are of the opinion that the contagious risks arising out of the fall of SVL and others may create problems for US financial system, which doesn’t augur well for Indian IT industry. BFSI is the largest vertical for Indian IT firms with many drawing more than 30 per cent of their revenue from this key vertical.

The crisis has sent shock waves across the global financial system with banking stocks getting hammered in the US, European and Asian exchanges. SVB, which is 16th largest banking institution in the US, has led to fears of many small and medium-size banks falling in coming quarters. Due to rise in interest rates, many US banks are sitting on losses on their government bond portfolio. According to Federal Deposit Insurance Corporation (FDIC), US banks were sitting on $620 billion in unrealized losses at the end of 2022.

“Leading indicator of economic slowdown comes from the banking system,” V Balakrishnan, Chairman, Exfinity Ventures & former CFO of Infosys, earlier told Bizz Buzz.

Despite a gloomy economic outlook, US banks are earlier expected to increase their technology spend budget for 2023, ICICI Securities in January said. However, current crisis may bring in change in technology spend.