Banking crisis will hit growth prospects of Indian IT sector

Banking crisis in the US and Europe is roiling the global markets. Although the magnitude of its impact remains unknown, the initial blow is distinctly visible. Banking stocks remain under pressure even as the world is guarded while figuring out whether the current crisis in some banks will spill over to the entire industry. It would be too damning should that tragedy befall as banks are interlinked to most sectors and this may affect credit growth and also slowdown the overall economy. One should realise that relationships of banks with technology companies have grown manifold over the years. With ‘going digital’ being the in-thing, most banks are fast-tracking their digital transformation, especially in the aftermath of Covid-19.

There is no room for doubt that the banking sector’s bolt from the blue has jolted technology industry as it has overbearing pacts with banks worldwide. This is irrespective of whether it is for developing user-friendly interfaces and managing their tech infrastructure or moving data to private cloud, banks are heavily dependent on the dexterity of IT whiz-kids. IT firms are now concerned about the technology spend by banks in the coming quarters. After all, BFSI (banking, financial services & insurance) is the largest vertical for most IT players, whose one third of revenue is dependent on the technology spending by banks. Things have remained gloomy for BFSI vertical since October. Mortgage segment, which deals with realty loans, is currently under strain in the US as an off-shoot of the four per cent raise brought about by the Federal Reserve that has put the housing market under intense pressure. Loan growth has slipped and defaults have increased.

As the revenue of most IT entities stem from transactions, a fall in activity is dipping their earning to substantial proportions. It is likewise with the other critical segment of BFSI vertical-investment banking, which is also in turbulence. With equity markets becoming volatile, activities of investors have taken a hit. Those apart, any fall in deposit and credit growth in the retail segment is also bad news for the IT sector. To make matters worse, mergers and acquisitions within the banking sector (like UBS taking over Credit Suisse) will lead to loss of business for quite a few IT vendors.

Meanwhile, these factors should be seen in conjunction with other aspects. Firstly, most global banks have transferred a critical part of their technology operations in-house and currently manage through technology captives in offshore centres in countries like India. It creates opportunities for the IT firms as some of these distressed units are likely to be up for sale in the coming quarters. Secondly, any such distress opens up opportunities for the Indian IT sector. As banks look at cost savings, they are likely to outsource some work to IT vendors with Indian IT firms being the gainers. Given this hazy picture, one cannot afford another crisis that could cause economic upheaval considering the high interest rate regime and Russia-Ukraine war that are already threatening to derail the global growth story.