Anti-Wall Street sentiment to take a toll on Indian IT

Bangalore: The plan of anti-Wall Street to sweep the U.S. and UK, may affect Indian IT companies, who depend heavily on the western world's financial industry.

More than $25 billion of software exports from India is contributing to big American and the UK banks such as JP Morgan, Citibank, Barclays and RBS. Companies such as TCS, Infosys and Wipro derive a large part of their income from these institutions by running their business and IT systems and doing integration projects for firms wishing to merge.

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While nobody is talking about another financial crisis, strident anti-big banks tone being struck by politicians, former regulators and the public is arousing concern among Indian technology executives, industry associations and independent experts. "Negative public sentiment is a concern because they can drive regulations. People still think that the financial greed has led to loss of jobs and there are enough 'bonus' stories coming out, causing more damage," said Girish S Paranjpe, Joint Chief Executive of Wipro.

Their worries are not without basis. Reports of the big banks giving large bonuses to their staff have not gone down well with the public. Anger is mounting on Capitol Hill and the White House over what they perceive to be reluctance of the banks to lend to small businesses and consumers leading President Obama to lash out at 'fatcat bankers' recently. The U.S. Congress may see the introduction of a Bill that seeks to bring back the provisions of the Glass-Steagall Act, the depression-era legislation that was repealed in 1999 when Bill Clinton was the president. The act separated commercial banking from investment banking and prevented banks that took deposits from the public from underwriting securities. Repeal of the act is widely believed to have made banks take large market risks leading to the financial crisis of 2008-2009.

The Republican Senator and the 2008 presidential candidate John McCain and Democrat senator Maria Cantwell are seeking to introduce a bill that would include provisions of the act. The bill does not enjoy popular support and is not guaranteed to pass, according to reports in the U.S.

Around a decade ago, the U.S. had repealed the 1903s Glass Steagall law enabling the rise of large banking conglomerates such as Citigroup, JP Morgan Chase and Bank of America. If the act is reinstated, Bank of America and Merrill Lynch will have to be separated again, and JP Morgan will have to give up the trading business it acquired from Bear Stearns. This will obviously affect the Indian IT companies which have recently bagged a number of orders relating to integrating systems and processes of firms who have concluded mergers and acquisitions (M&A) deals. Indian IT firms could also be affected, if the banks are broken up and the balance sheet sizes become smaller. In the UK, there is a great clamour for the banks such as RBS to scale down and focus on a few geographies than be global players.

Experts such as Bob McDowall of UK-based research firm TowerGroup said that as these banks shrink their balance sheets, technology business could witness a reduction in the medium-to long-term. "A change of government in the UK next year accompanied by a transfer to the Bank of England of the role of lead regulator could see re-examination of the merits of division of banks in to high risk and utility institutions. I think the 'Glass Steagall' theme is seen as an Anglo-Saxon issue, though I think it applies equally to Deutsche, Credit Suisse and UBS," said McDowall.

The UK conservative party is leading the polls right now and is widely tipped to form the next government in elections that must be held before June 2010. The party spokesperson said that it will push for stronger financial reforms, if it comes to power. "We believe that the best way to prevent this build-up of risk and leverage is better regulation. That is why we have set out plans to put Bank of England in charge of prudential supervision, and why we have called for tougher regulations, such as increased capital requirements, the introduction of living wills and reforms to remuneration practices," said Conservative Party Spokesperson Ramesh Chhabra.