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Project:-Indian Banking in the New Millennium
Module:-Voluntary Retirement Scheme - The Need and Urgency of
PSBs to Downsize their Workforce
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Continued from Previous Page VRS Preface & Introduction
Voluntary Retirement Scheme (VRS) What it is & More - Part: 2 - The Need and Urgency of PSBs to Downsize their Workforce
[by Ms. K.R,Chitra, PG Student, M.Phil, Kerala University]

This dissertation on Voluntary Retirement Scheme(VRS) with special reference to the schemes implemented by State Bank of India (SBI) and State Bank of Travancore (SBT) is an attempt towards an in-depth study and critical analysis of the subject to highlight the diverse features of the Scheme floated by Public Sector Banks (PSBs) in the year 2000 vis-a-vis both the objectives of the banks and the aspirations of the employees who opted to retire under the scheme. It is compiled by Ms. Chitra K.R., a student preparing for MPhil from Dept of Economics, University of Kerala.


We now comeback to the earlier question about the need of the PSBs to downsize their work force or to answer the question - Why VRS? VRS in Banks was formally taken up by the Government in November 1999. According to Finance Ministry on the basis of business per employee (BPE) of Rs. 100 Lakhs, there were 59,338 excess employees in 12 nationalised banks, while based on a BPE of Rs. 125 Lakhs the number shot up to 1,77,405. How has all this come through?

During 1960s-80s, Indian banks went in for massive recruitment at various cadres due to vast expansion in retail banking and branch expansion .It was an era of development banking and extending banking to every nook and corner. Banking was carried to every sphere of productive activity to reach and cater to the needs of every sector of the economy. And every type of economic activity ranging from the largest to the smallest (like the small farmers, petty artisan, small business, retail trade etc.) came to be covered by bank credit and financial assistance. All these resulted in massive increase in manpower requirement of the Banks. The period of vertical growth receded in the late Eighties. The phase for consolidation of the banking system was felt. The technological advancements in telecom and information technology and the reforms in the banking sector towards the end of the century have driven the banks to caution because numbers have now become irrelevant. Banking has changed to technology oriented and no more people oriented.

It is belatedly realised that productivity of the staff has came to have a significant bearing on the bank's overall performance. It dawned that, this is the one factor, which can enable the bank to develop a unique competitive advantage. Banking being in the service industry, the staff efficiency becomes an important factor for assessing the bank's performance. The profit per employee is an appropriate measure for this. During the year 1999-2000, the profit per employee as an average of all the PSBs was 0.65; for the private banks it was 1.46 and for the foreign banks it was 5.61. The lower ratio in the case of PSBs can be due to the over-staffing.

This is because foreign banks operate on global standards with use of high-tech tools and applications like total use of computerised functioning replacing manual operations, with ATMs operating on a 24/7 (full-day and full-week) basis dispensing rush at cash counters, and credit cards or plastic money replacing endless counting and recounting of cash (currency notes) a practice still widely prevalent in Indian Banks.

Since the beginning of the Eighties, the International Financial Markets are witnessing revolutionary structural changes in terms of financial instruments and the nature of lenders and borrowers. On the one hand there is a declining role for the Banks in direct financial intermediation. On the other hand there is enormous increase in securitised lending, the growth of new financial facilities of raising funds directly from investors. There is also the growth of innovative techniques such as interest rate swaps, financial and foreign exchange futures and foreign exchange and interest rate options. Growing deregulation in national financial markets and the revolution in telecommunication and data processing technologies resulted in the better integration of financial markets in all countries between the domestic financial system and the foreign Banking and non-banking institutions.

While such revolutionary changes were sweeping the global arena, the Indian Banking context was completely insulated and kept captive up to the beginning of the Nineties, on account of directed policies on major business and operational matters, in particular those relating to credit, investment, rate of interest etc. Basic policy parameters were decided by RBI and the Finance Ministry and Banks had little options in this respect. This phenomenon changed totally in the Nineties, and changes sweeping the international banking field started influencing the Indian financial markets and banking institutions, with the advent of the Economic Reforms, and the Reforms in the Financial and Banking Sector.

Globally Banks in the period were growing in volume and diminishing in size (of manpower) due to application higher technology and development of high-tech banking, while in India Banks were growing in physical size still continuing with manual operations and the outmoded 'pen & ink' systems, resulting in high-cost, low productivity, bad customer care and diminishing profits and reduced sustainability. This led to a crisis in the year 1992 when the first phase of reforms were introduced in the Banking Sector. The Reserve Bank of India in its web-site has described the symptoms of the crisis in the following words:

"Till the adoption of prudential norms relating to income recognition, asset classification, provisioning and capital adequacy, twenty-six out of twenty-seven public sector banks were reporting profits (UCO Bank was incurring losses from 1989-90). In the first post-reform year, i.e., 1992-93, the profitability of the PSBs as a group turned negative with as many as twelve nationalised banks reporting net losses. By March 1996, the outer time limit prescribed for attaining capital adequacy of 8 per cent, eight public sector banks were still short of the prescribed level."

Consequently PSBs in the post reform period came to be classified under three categories as -

  • healthy banks (those that are currently showing profits and hold no accumulated losses in their balance sheet)

  • banks showing currently profits, but still continuing to have accumulated losses of prior years carried forward in their balance sheets
  • Banks which are still in the red, i.e. showing losses in the past and in the present.

Substantial recapitalisation of the affected PSBs (total outlay around Rs.21,000 Crores), deregulation of control by Government of India and RBI, allowing total discretion for the Banks to raise fresh capital from the market, progressive reduction in SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio) obligations of the banks and several other measures were introduced in the Nineties to tune Indian Banking to the level of the International players. Speedy process of computerisation of banking operations and application of Information technology was undertaken by the State-owned Banks.

But the set-back of eroded profitability of the Banks could be rectified only by neutralising the two major problems inherited by the PSBs as a past legacy as under:

  • Huge unproductive labour rendered surplus on account of rationalisation and computerisation of operations

  • Mind-bogging accumulation of non-productive assets (gross estimated at around Rs.1,00,000 Crores of failed credit rendered sticky and difficult of recovery).

Considering the second problem i.e. non-performing assets (NPA) is the outside the scope of this study. But to redeem the banks from the recurring burden of surplus manpower, the Government accepted the one-time solution of Voluntary Retirement Scheme.

Methodology of Planning and Designing the Scheme

Government in the middle of the year 2000 cleared a uniform Voluntary Retirement Scheme (VRS) for the banking sector, giving public sector banks a seven-month time frame. The IBA has been allowed to circulate the scheme among the public sector banks for adoption. The scheme would remain open till March 31, 2001. It would become operational after adoption by the respective bank board of directors. No concession was made to weak banks under the scheme. The scheme was envisaged to assist banks in their efforts to optimise use of human resource and achieve a balanced age and skills profile in tune with their business strategies.

The text of the VRS scheme and guidelines as approved and issued by the Government of India are appended in the Annexure.

As per the scheme all permanent employees with 15 years of service or 40 years of age will be eligible to avail of it with exgratia amounting to 60 days salary. Employees eligible for VRS, but who do not want to avail themselves of the scheme, have been provided with the option of choosing to go on a sabbatical for 5 years While the right of refusal to give voluntary retirement has been granted to the bank management, recruitment against vacancies arising through the VRS route has been disallowed. Banks have been asked to undertake a complete manpower planning exercise before offering the VRS scheme.

As per earlier estimates the average outgo per employee under the banking VRS scheme was reckoned at the range between Rs. 3 Lakhs and Rs. 4 Lakhs. However, the aggregate burden on the banking industry is difficult to work out, as one cannot estimate how many employees would finally opt for the scheme. To minimise the immediate impact on banks, the scheme has allowed them the stagger the payments in two instalments, with a minimum of 50 per cent of the amount to be paid in cash immediately. The remaining payment can be paid within six months either in cash or in the form of bonds.

After implementation the average per head estimated cost for the entire set of 26 banks worked out to Rs 5.93 Lakh. For the 18 nationalised banks, the average cost has been estimated at Rs 6.70 Lakh, while for SBI and its seven associate banks, the figures work out to Rs 6.52 Lakh and Rs 5.72 Lakh respectively. The response to the VRS offer seems to have been much higher from officers, compared to clerical and other sub-staff.

The estimated cost has been worked out on the basis of the exgratia payment that would be doled out to the applicants. This includes all payments under the scheme, excluding cost of regular terminal benefits for which banks are required to make provisions on an ongoing basis.

PUBLIC sector banks took a hit of about Rs 7,490 crore on account of the recently concluded voluntary retirement scheme (VRS), according to a consolidated picture compiled by the Ministry of Finance. The scheme came to a close on March 31,2001.

Out of the Rs 7,490 crore, the cost for the 18 nationalised worked out to Rs 5,373 crore, while for SBI and its seven associate banks (SBI group), it would work out to Rs 2,117 crore. This is as per initial estimate on 31.03.2001, when the scheme closed. The total outgo inclusive terminal benefits already provided for was estimated at Rs.10,000 Crores.

The Economics of the Scheme

Let us consider the example of a bank with an assumed strength of 50000 workers, which has calculated that 40,000 employees are sufficient to carry on existing the activities of the Bank and 10,000 employees considered as surplus and no longer needed. It is assumed that these 10,000 employees have an average service span of 15 years and each draw average salary of Rs.1.20 Lacs per year. As the employees are deemed surplus, and the work could be carried on without them, the return to the Bank on account of the employees is NIL, while the revenue expenses incurred per year on the surplus employees is Rs.12,000 Lacs (or Rs.120 Crores). If the Bank decides to compensate each employee with 60 months wages (at Rs.10,000/- p.m. and send them under voluntary retirement scheme, it would incur a one time expense of Rs.600 Crores. As government has permitted to amortise this expenditure on a deferred basis over five years, the expense for each year is Rs.120 Crores, while saving is also Rs.120 Crores. In the first five years the Bank breaks even with no loss or gain and from the 6th year onwards it saves Rs.120 Crores for the next ten years. The net spread over benefit to the Bank during the entire span in the aggregate is Rs.1200 Crores.

The employee would have earned Rs.18 Lacs in his remaining service for the next 15 years, which he chooses to forego. The present discounted cash value of the amount at the rate of 9% p.a. comes less than Rs.4 Lacs and against this he gets Rs.12 Lachs (assuming he has completed 20 years of service already and eligible for 120 months compensation). A progressive and forward-looking employee can also utilise the opportunity to retrain himself in his own discipline of banking and finance by undergoing further qualifying training and passing professional courses and equipping himself with higher knowledge and expertise during the next 2 or 3 years and re-enter service either in banking or any financial service (insurance, mutual fund etc.) at a much higher level. In service industry the value of an employee is the knowledge and skill he possess. The employee after VRS gains the benefit of possessing free time and he can best utilise this resource with the money he holds in his hands for securing better knowledge and expertise to seek a fresh career. But it needs a forward looking and career planning by the employee quitting service under VRS to convert the cash in hand and the time-saved on account of freeing himself from the obligation to attend office, into valuable and permanent opportunities and future benefits. This is on the premise that the service industry in today's economy is the fast growing sector of our National Economy.

The basic economics and viability of the scheme is apparently beneficial for both the employer and employee. But these are based on specific assumptions for the employer that the functioning of his banking service at optimum efficiency will not be affected even after dispensing with 10000 of his workers. It also rests on the wisdom of individual employees who came out under the scheme to develop further knowledge and expertise and seek opportunities under greener pastures.

Voluntary Retirement Scheme (VRS) What it is & More - Part: 3


View List of Articles - Projects on Indian Banking


  1. Indian Banking in the Post-Reform Era

  2. Indian Banking - other Pro- jects

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