ETtech Opinion | IT services: how to succeed beyond the banking crises

2008 – The subprime crisis breaks in the US with the demise of Lehman Brothers and later in that financial year, an industry icon, Satyam, collapses. Both these events could have taken down less resilient industries and companies or at least led to a temporary decline in fortunes.

As chairman of Nasscom that year, it was my task to boldly predict that the industry would weather the storm and still grow, and grow we did, albeit in single digits.

This year, we have seen the sudden decline of Silicon Valley Bank (SVB) and the collapse of Credit Suisse into the arms of its bigger Swiss competitor, and the questions are flying thick and fast – is this the subprime moment of 2008 all over again? What will be the impact on the IT services industry where many companies have north of 25% of business coming from the BFSI segment?

To answer this, let us critically analyse the problem as we see it (thanks to SCube Research in Singapore with their help in this analysis).

The 2008 crisis was one triggered by lack of liquidity, poor credit quality and inadequately capitalised banking systems in the West.

This time, the issue in the case of regional banks is excess holding of US treasuries which are high investment grade. SVB is a case in point which chose to keep its money in bonds rather than high-risk credit assets and had to book losses as interest rates started climbing at a quick pace.

Sale of these assets at reduced levels rather than being able to borrow against these at face value triggered a crisis of confidence and a run on the bank. The contagion impact could have triggered a major crisis which caused the Federal Deposit Insurance Corporation to step in to insure deposits.

The impact on the general economy is the move towards larger banks, possibly real assets like gold and silver (could we see crypto benefit – one hopes not) and loss of jobs in the high employment banking sector.

Postponement of expenditure including discretionary outsourcing projects in the digital area and tightening of funds availability for SMEs and VC funded entities could be other challenges.

This could lead to more regulation in the financial sector in the US, though Asia is largely decoupled except for possible contagion effects and India, with its well-regulated banking system, has little cause for worry.

For IT services, there could well be some slowing down of contracts but with the significant proportion of industry customers being large financial institutions who stand to benefit from a flurry of new deposits, the longer-term impact could well be positive with minimal medium-term downside risks.

While one would expect that the combined impact of a likely recession and the jitters in the financial markets might dampen order input in the first half of the year, all will still be well for an industry which is now well embedded in all the major corporations of the Western world.

(Ganesh Natarajan is chairman of 5F World, Honeywell Automation and a central board member of State Bank of India. Views are personal.)