Sub-prime fear now haunts BPOs

The US subprime lending crisis forced Mumbai-based WNS Holdings to revise its net income guidance by a whopping 60 per cent, and this is worrying the $8 billion business process outsourcing (BPO) sector players and analysts.

The concern is warranted since pure-play BPO players (excluding IT firms that also provide BPO services) derive anywhere between 40-70 per cent of their revenues from the banking, financial services and insurance (BFSI) segment. Mortgage process outsourcing comes under this category.

Consider this. EXL Services -- among the top 10 BPOs in the country -- gets 70 per cent of its revenue from the BFSI segment. Of this, 7-8 per cent comes from its two clients in the mortgage segment. One is a large mortgage lender bank -- IndyMac Bank, which contributes 5 per cent to its revenue (IndyMac is also a client of WNS). While the other is a small client in the sub-prime lending segment and contributes 2-3 per cent to the revenues. Rohit Kapoor, president and co-founder, EXL Services, said: "We have two clients in the mortgage segment. As of now we have received no issuance from the clients. But given the uncertainty in the market it is a risk."

The BFSI segment accounts for around 34 per cent of WNS' revenue. Around 22 per cent comes from insurance, 9 per cent from mortage (from 9 customers -- First Magnus being the biggest) and 3 per cent from the rest. Similarly, HOV Services which provides BPO services to the finance and accounting sector, offers its services to 5 clients in the mortgage segment. The company has four of the top 10 clients from the banking segment and 9 of the top 20 from the insurance vertical. R Vijaykumar, CFO, HOV Services said: "As of now we have had no issuance or concern being shown by our customers." 

OPEN POSITIONS (The BPO industry's exposure to the banking, financial services and insurance industry)
Company	Revenue share (in %)
EXL Services	70.00
Genpact	44.50
TCS	43.00
Mphasis	42.00
Firstsource	37*
Infosys	36.00
Wipro	24.00
Satyam	24.00
HCL Tech	28.00
* As on end June 2007

The BFSI segment currently accounts for 44.5 per cent of the total revenue of Genpact -- the largest BPO services provider in India. The company declined to comment, stating it was in a quiet period. Aditya Birla Minacs, a subsidiary of Aditya Birla Nuvo, has two customers in the mortgage services.

Firstsource, a pure-play BPO services company, maintained it has not been affected by the mortgage crisis. The company has only one UK-based client servicing the mortgage segment. "While we do have one client offering mortgage services, its exposure is restricted to the UK markets," said the spokesperson.

Biggies like TCS, Wipro and HCL maintained the crisis will not affect them. A TCS spokesperson said: "We have no exposure to subprime lending and hence do not foresee any impact on our revenues from the BFSI vertical."

Likewise, Girish S Paranjpe, President of Finance Solutions Division, Wipro Technologies, reasoned: "Our exposure to the subprime market is less than 1 per cent."

"HCL's exposure to the US mortgage industry is mainly with the banks with mortgage lending operations (not with pure-play mortgage lenders which specialise in all kinds of mortgages including sub-prime and Alt-A). To that extent, there is no significant impact," said an HCL Technologies spokesperson.

Alok Shende, director, ICT practice, Frost and Sullivan, said, "The full impact is yet to be understood. However, there will be a psychological impact as customers may reduce spending. It might also lead to delay in the deal cycles as clients would like to wait for some stability."

Siddharth Pai, partner at outsourcing consultancy firm TPI, concurs: "I think it is early to comment. The size of the entire subprime portfolio is small in comparison to the entire mortgage outstanding, so we hope the exposure is limited to a few institutions." Likewise, others are waiting for the story to unfold.