India is seen to be relatively sheltered from the shocks of the crisis. It is unlikely to impact India’s banking system or its broader macroeconomic stability, unless more banks in the US or Europe fail and the crisis gets pronounced. Yet, analysts and some economists believe indirect impact of the banking crisis might ripple through India’s economy and manifest in India’s tech sector, markets and startups.
Impact on India’s tech sector
The banking crisis in the US and Europe could take a toll on the Indian $245 billion IT business process management industry, which draws close to 41% of its revenues from the banking, financial services and insurance (BFSI) sector, analysts say. But all of the impact won’t be negative.
The collapse of large banking institutions may not only lead to a reduction in existing business but also trigger reduced tech spending in the future along with delayed deal closures, according to an ET report that cites expert views. Companies such as Tata Consultancy Services (TCS), Infosys, Wipro and LTIMindtree, which have high exposure to US banking institutions, are likely to be impacted if the crisis worsens.
BFSI dominates enterprise tech spend and offshore outsourcing, contributing around 41% of revenue for the industry in FY23 per industry body Nasscom. North America contributes to over 50% share of revenue for the companies. Wipro has the highest revenue from BFSI at 35%, followed by TCS (31.5%), Infosys (29.3%) and HCLTech (20%). At 16%, Tech Mahindra has the lowest share from this sector among the top IT firms.
In a note released last week, JP Morgan said that it estimates the exposure of regional banks in the US is highest for India’s largest IT firms TCS and Infosys. It is less than 2-3% of their overall revenue, though.
However, there will be some positives. Firms like TCS and Infosys are best placed to win the cost optimisation projects that will come up now due to the stress in the sector and “even one large deal win can bring a substantial positive pace of growth for the companies, according to Peter Bendor-Samuel, founder of IT consultancy and research firm Everest Group.
According to Vineet Nayar, Indian IT veteran and former CEO of HCL Technologies, while it’s difficult to predict what happens next, the uncertain environment will impact new projects for the sector.
Impact on India’s banking sector
Foreign banks have a relatively smaller presence in India with a 6% share in total assets, 4% in loans and 5% in deposits. They are more active in the derivative markets (forex and interest rates) where they have a 50% share. Credit Suisse is not being seen as a direct threat in India as it owns just 0.1% of assets in the Indian banking system. It is the 12th largest foreign bank in India, owning assets worth Rs 20,700 crore.
In India, UBS has much smaller operations, having closed down its sole branch in the country in 2013. It ran a cash equities business, allowing foreign institutional investors (FII) to transact in the country through participatory notes. Credit Suisse still holds its sole branch licence in India and has a wider business including wealth management, investment banking, and brokerage services. It is also very active in high-yield promoter financing against shares.
Credit Suisse has a presence in the derivatives market and funds 60% of its assets from borrowings, of which 96% has a tenure of up to two months, according to a study by Jefferies. Given the relevance of Credit Suisse to India’s banking sector, analysts see softer adjustments in the assessment of counterparty risks, especially in the derivative market. Experts say the Indian banking system is unlikely to witness any major spillover effects from SVB.
Impact on back-office jobs
After UBS bought Credit Suisse, there are concerns that restructuring of operations and cost-cutting measures might impact their India business, especially jobs.
UBS and Credit Suisse’s India-based technology back offices, which together employ about 14,000 people, can see the maximum impact as rationalisation of roles and focus on costs after the UBS takeover of its stressed rival cause job losses at the multi-city facilities known locally as global in-house centres.
UBS and Credit Suisse have about 7,000 people each across three Indian cities in their technology centres. After the merger, role rationalisation is likely to lead to many job losses in these areas as UBS will seek to retain only the best talent at Credit Suisse. “They will probably not need that many people; so rationalisation is inevitable,” a banker familiar with both banks’ operations in India told ET. “On the banking side, UBS was already very thin in India; so the larger question is whether it would want to continue with Credit Suisse operations, or will also reduce them in line with its capital-light philosophy.”
Impact on Indian startups
Depositors of SVB heaved a sigh of relief when US regulators promised to make all the depositors whole. Silicon Valley Bridge Bank, the entity created by the Federal Deposit Insurance Corp. is taking over the failed institution. However, many startups will continue to experience the effects of SVB failure. The crisis has also impacted a large number of Indian startups such as cross-border SaaS firms and Y Combinator’s portfolio firms.
Startups with funds in SVB are finalising ways to transfer their money elsewhere, even as US regulators made the accounts at the now-shut bank accessible to depositors. Indian startups had deposits worth $1 billion in SVB, according to IT Minister of State Rajeev Chandrasekhar.
While some of them opened accounts at bank branches at the International Financial Services Centre in Gujarat’s Gift City as such banks allow customers to open foreign currency accounts for international transactions others were exploring transferring their deposits to neo banks like Brex in the US and traditional institutions such as JPMorganChase, HSBC and CitiGroup. In the Gift City, RBL Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and HSBC were working with startups and founders to open accounts.
The SVB fallout on the domestic startup ecosystem could manifest as temporary liquidity squeeze and challenges in raising funds, This can also cause thousands of job losses. There is a concern whether the new management will continue to support startups in the manner SVB had been doing. SVB had become the preferred bank for tech startups due to the flexibility, special benefits and customised solutions it offered to them.
Impact on India’s markets
The global banking crisis has generated a broad negative sentiment for markets and a flight of capital to safe havens. But brokerage firm Anand Rathi says the SVB episode might have a positive impact on the Indian stock markets. “As a result of the incidents, the outlook for interest rates improves. This could increase the price-to-earnings multiples used to value Indian equities. We continue to believe that the Indian equity markets will generate returns of approximately 12%,” it said in a note.
The domestic brokerage firm also said the RBI will likely adopt a more dovish monetary policy stance in the upcoming April MPC meeting similar to what Federal Reserve would do in its Federal Open Market Committee meeting, which begins on Tuesday. The outlook for the country’s interest rate environment is more optimistic than previously, it further said.
“The anticipated decline in interest rates, including bond yields, would reduce the discounting rate on future earnings of companies, which would have a positive effect on the valuation of Indian equities over the medium- to long-term,” the report said.
