US economy is facing turbulence because of faliure of subprime mortgage sector. In a subprime mortgage, a finance company gives loan to a borrower, whose creditworthiness is doubtful. The market for such borrowers in US is very large.
This has affected US economy and there is apprehension of an overall slowdown, because of weakening housing sector. Subprime mortgage market had nearly tripled during the housing boom period of 2004 and 2005. But reduction in property prices, higher interest rates and slower economic growth have resulted in increased rate of defaults among sub-prime borrowers. The problems further got compounded with increase in interest rates on subprime loans as defaults rose.
The problems in the sub-prime mortgage market may lead to more tightening of consumer credit. This would put household finances under greater strain. Such a development could lead to even a recession in US, with potential spillovers to other countries. Recent developments indicate that sub-prime lending concerns are spreading globally.
Indian outsourcing firms nervously hope the US loan crisis does not deteriorate as the business of processing mortgages in their biggest market dries up and some clients keel over.
Firms such as iGate Global Solutions and WNS that serviced American mortgage lenders are already feeling the impact of the crisis, which a US survey this week called the biggest short-term threat to the world’s largest economy.
India’s outsourcing industry is now worrying about the crisis impact and a possible slowdown in the US economy on technology budgets of banking, financial services and insurance clients that farm out work to India to cut costs.
The impact is now limited to individual companies that had a reasonable amount of mortgage servicing business. It is expected that it will blow over soon, but if the ripples travel to other areas of the US economy, it could be bad for the Indian outsourcing industry.
Processing loan mortgages during the US housing boom was a profitable line of business for pure-play outsourcing firms that logged 47 per cent growth to 209 billion rupees (4.6 billion dollars) in revenue during the year.
The mortgage business has virtually dried up as US financial firms try to weather the subprime crisis, caused by defaults on loans made to home buyers with patchy credit histories, by staunching credit.
In the US, sub-prime loan originations have almost ceased and consequentially the demand for origination services has dropped.
An Indian company’s revenue from mortgage servicing fell to seven percent of sales in the three months ended June 30 from a peak of 10 percent in the previous quarter.
The revenues continue to be at risk due to the on going subprime market turmoil. An Indian company iGate had assigned other duties to about 100 employees that used to process mortgages.
The outsourcing arm of Infosys Technologies, India’s second-biggest software maker, and iGate Global Solutions, both based in Bangalore, India lost a major client when GreenPoint Mortgage was shut down by parent Capital One Financial Corp. Mumbai-based outsourcer WNS said this month it expected to lose business from US mortgage firm First Magnus Financial.
First Magnus has filed for bankruptcy, forcing WNS to assign other duties to about 500 staff. Software firms such as Infosys are better protected from the US loan market turmoil than companies that earn revenue from back-office services such as transaction processing and risk management.
Still, any US slowdown would hit the entire information technology industry, which earns two-thirds of its 50 billion dollars in annual revenue from the US. Indian software and outsourcing companies have been speaking to their clients, economists and financial analysts very frequently.
There have been concerns of a slowdown in the US economy for two quarters but Indian companiesâ€™ clients do not anticipate an actual slowdown. Clients concerned about declining profits tend to initially cut costs, including on outsourcing but will farm out more work over the “medium term” as they try to increase revenue.
Some outsourcing companies scent an opportunity in the crisis. Quatrro BPO Solutions this month paid an undisclosed amount to acquire the mortgage processing business of US-based Preferred Financial Group.