Indian outsourcers start to feel subprime fallout

Ripples from the U.S. subprime mortgage crisis have reached India's back-office outsourcing sector, where mostly smaller firms are feeling the pinch as U.S. companies cut back or stop some spending on services.

Already struggling with a stronger rupee and rising wages, the fear for outsourcers is that the subprime woes will spread, although larger players such as Infosys Technologies say this could open up new opportunities.

"The key issue here is the number of challenges being faced at the same time," said Atul Vashistha, chief executive of U.S.-based outsourcing consultancy firm neoIT.

"The question is how do they handle the exposure to a slowdown in the financial sector as the subprime woes spread to their other financial businesses." Bangalore-based iGate Global Solutions Ltd (IGAT.BO: Quote, Profile, Research), a mid-sized outsourcer, has seen its income from U.S mortgage companies drop to 7 percent of its revenue in the June quarter from more than 10 percent in the December quarter.

"This has come like a second wave. It started in February-March and after that it kind of died down. Now it has picked up, which is of course a little concerning," iGate chief Phaneesh Murthy told Reuters.

iGate's clients include GreenPoint Mortgage Inc, a unit of Capital One Financial Corp which said on Monday it would shut the wholesale mortgage unit due to the downturn.

Last week, India-based outsourcing company WNS (Holdings) Ltd lowered its fiscal 2008 outlook as work stopped coming from U.S. mortgage lender First Magnus Financial Corp, which closed funding home loans and taking mortgage loan applications.

Currently the problems were confined to a small sector and there were no signs of a broader slowdown in the financial sector's technology spending, said iGate's Murthy, whose company offers services such as loan processing and helpdesk facilities. "However, as a general philosophy what has happened in the past is that when subprime goes, prime tends to follow with a few months lag. That's a concern because if the prime follows then it's a problem," he said.

The back-office firms have thrived providing western firms with services such as insurance claims processing, payroll management and answering customer queries. Driving the boom is a large, skilled -- and cheap -- English-speaking workforce.

In the year to March, back-office services exports grew by a third to $8.4 billion and they are projected to rise to $11 billion in the current financial year, according to the National Association of Software and Service Companies.

UBS Investment Research said in a report that if weakness in the U.S. mortgage sector spread through the financial services sector and led to a U.S. recession, then discretionary spending on services provided by companies such as Infosys would be hit.

However, Infosys BPO, the company's outsourcing unit, saw opportunity where others saw a threat. "We are not too concerned about this subprime mortgage impacting our processes," said Amitabh Chaudhry, chief executive of Infosys BPO.

Chaudhry said the key factor that drove the outsourcing boom -- a need to cut costs -- would be even more prevalent in any economic downturn. "I'm not saying that should happen, but if it does happen then I think it's not a negative, it's positive."