VRS IN PUBLIC SECTOR BANKS

VRS in public sector banks

I

n the present globalised scenario, right sizing of the manpower employed in an organisation has become an important management strategy in order to meet the

increased competition. The voluntary retirement scheme (VRS) is the most humane technique to provide overall reduction in the existing strength of the employees. It is a technique

used

by

companies

for

trimming

the

workforce

employed in the industrial unit. It is now a commonly used method to dispense off the excess manpower and thus improve the performance of the organisation. It is a generous, tax-free severance payment to persuade the employees to voluntarily retire

from

the

company.

It

is

also

known

as

“GOLDEN

HANDSHAKE” as it is the golden route to retrenchment. In India, the Industrial Disputes Act, 1947 puts restrictions on employers in the matter of reducing excess staff by retrenchment, by closures of establishment and the retrenchment process involved lot of legalities and complex procedures. Also, any plans of retrenchment and reduction of staff and workforce are subjected to strong opposition by trade unions. Hence, VRS was

1

VRS in public sector banks

introduced as an alternative legal solution to solve this problem. It allowed

employers

including

those

in

the

government

undertakings, to offer voluntary retirement schemes to off-load the surplus manpower and no pressure as such was put on any employee to exit. The voluntary retirement schemes were also not subjected to not vehement opposition by the Unions, because the very nature of its being voluntary and not using any compulsion. It was introduced in both the public and private sectors. Public sector

undertakings,

approval

of

the

however

needs

government

to

before

obtain

prior

offering

and

implementing the VRS. VRS means Voluntary Retirement Scheme. Employers who want to reduce the employee strength give some employees the option to retire before normal retirement age. The employees may or may not accept this option. Those who accept the option are

VRS

employees.

The

VRS

employees

get

the

compensation. They receive lump sum from the employers including VRS compensation, Provident Fund, Gratuity, Leave Encashment etc. The VRS employees have to depend on income from the investments of the lump sum for their future

life.

2

VRS in public sector banks

A business firm may opt for a voluntary retirement scheme under the following circumstances:• Due to recession in the business. • Due

to intense competition, the establishment becomes

unviable unless downsizing is resorted to. • Due to joint-ventures with foreign collaborations. • Due to takeovers and mergers. • Due to obsolescence of Product/Technology • Changes in technology, production process, innovation, new

product line • Realignment of business - due to market conditions

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VRS in public sector banks

Procedure for Voluntary Retirement Scheme followed by the employer The employer has to issue a circular communicating his decision to offer voluntary retirement scheme – mentioning therein • The reasons for downsizing • The age limit and the minimum service period of employees

who can apply • The

benefits that are offered. It should be noted that

employees who offer to retire voluntarily are entitled as per law and rules the benefits of Provident Fund,’ Gratuity and salary for balance of privilege leave up to the date of their

retirement,

besides

the

voluntary

retirement

benefits. • The right of an employer to accept or reject any application for

voluntary retirement. • The date up to which the scheme is open and applications are

received for consideration by the employer. • The

circular may indicate income tax incidence on any

voluntary retirement benefits which are in excess of Rs. 5 lakhs, which is maximum tax free benefit under such schemes. • It should also indicate that those employees who opt for

voluntary retirement and accept the benefits under such

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VRS in public sector banks

scheme shall not be eligible in future for employment in the establishment. Procedure for VRS to be followed by the employee • An eligible employee may submit request opting for Voluntary

Retirement under the scheme to the Competent Authority through proper channel in a prescribed proforma which shall be available in the PSU. • The Competent Authority may after considering the application

and after giving an opportunity to the applicant; of being heard, pass a speaking order within a period of 3 months, either accepting or rejecting the request. • In case the Competent Authority fails to pass an order rejecting

the request by the due date as given above, the request would be deemed to have been accepted and the employee would be retired. • A copy of every order made under above shall be given to the

employee. • An employee who is aggrieved by an order of rejection

may within thirty days from issuance of such orders file • an appeal before the Administrative Secretary of the

Department under which the concerned PSU falls, whose decision shall be final and binding.

5

VRS in public sector banks • The date of acceptance of VRS by the competent authority will

be treated as date of voluntary retirement. Steps to be taken for introducing and implementing voluntary retirement scheme • If the company is a public sector undertaking obtain approval

of the government. • Identify departments/employees to which VRS is to be offered

more. • If there is a union of employees in the establishment involve

the union by communicating to them the reasons, the target group and the benefits to be offered to those who opt for the scheme. • Terms of VRS and benefits to be offered are to be mentioned in

the circular or communication to employees and decide the period during which the scheme is to be kept open. • Counseling

employees

implementing

the

is

scheme.

an The

essential

part

counseling

of

should

include what the retiring employee can do in future i.e. rehabilitation, how to manage the funds received under the scheme.

6

VRS in public sector banks • After receipt of applications for accepting VRS, scrutinize,

decide whose applications are to be accepted and those whose are not to be accepted. • For those whose application are to be accepted prepare a

worksheet

showing

the

benefits

each

will

receive

including other dues like Provident Fund, gratuity and earned leave wages for the balance un-availed earned leave, and tax incidence should the VRS amount exceed Rs. 5 lakhs. The challenges in implementing employees Exit • The reasons and need to introduce VRS should be discussed

with all management staff including top management. • The effect of downsizing including on the work or activities of

the establishment carried on is to be considered i.e. post reduction operations to be carried on should also be planned post plan reduction employee deployment. •Ensure all concerned employees and managers participate in the decision making to down size. • The downsizing plan should match with the Strategic plans of

the company. • Transparency should be seen and used in choice of persons to

be retired. • Be prepared to manage the after effects of the down

sizing - both social and psychological.

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VRS in public sector banks • Motivate employees who will stay with the company, remove

their apprehensions and fears, if any. • Provide professional assistance to employees who agree to

accept VRS to plan their post retirement, activities and financial management including, out placement. • The VRS should be made attractive and no pressures should be

used to ease out people. Merits of voluntary retirement Scheme • There is no legal obstacle in implementing VRS - as is

predominantly encountered in retrenchment under the labour laws. • It offers to the employee an attractive financial compensation

than what is permitted under retrenchment under the law. • Voluntary nature of the schemes precludes the need for

enforcement which may give rise to conflicts and disputes. • It allows flexibility and can be applied only to certain divisions,

departments where there is excess manpower. • It allows overall savings in the employee costs thus lowering

the overall costs. Demerits of VRS To a certain extent it creates fear, a sense of uncertainty among employees. Sometimes the severance costs are heavy and

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VRS in public sector banks

outweighs the possible gains. Trade unions generally protest the operation of such schemes and may cause disturbance in normal operations. Some of the good, capable and competent employees may also apply for separation which may cause embarrassment to the managements. It is found in practice that organisations may have to repeat the scheme if there is no response or poor response to the scheme by the

employees.

However,

there

are

instances

when

the

managements have really made the schemes very attractive by making it “Golden Hand Shake.” It is incumbent on the establishments that they do not recruit similar staff immediately after the implementation of voluntary retirement scheme. Such recruitment, in spirit and essence is contrary to the principle of staff being excessive or surplus.

In case

disciplinary

action

is

pending

against

an

employee, who has sought Voluntary Retirement, the Disciplinary Authority

shall,

after

considering

all

facts,

convey

to

the

Competent Authority whether the request of the employee should be accepted or not. In case the Disciplinary Authority decides that the request of such an employee for Voluntary Retirement be not accepted, the same shall be communicated to the employee in writing and he shall have a right to make an appeal as provided under section 9 (v).

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VRS in public sector banks

Amount of Ex-gratia An employee seeking Voluntary Retirement under the scheme will be entitled to the compensation consisting of salary of 35 days for every completed year of service and 25 days for every year of the balance of service left until super annuation. The compensation will be subject to a minimum of Rs.25,000/-

or

250

days

salary

whichever

is

higher.

However, this compensation shall not exceed 80% of the sum of the salary that the employee would draw at the prevailing level for the balance of the period left before superannuation. In case an employee is governed by a retiring/superannuation pension scheme the disbursement of pension shall commence from the month next to the date an employee would have retired in the ordinary course.

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VRS in public sector banks

100% of the amount of ex-gratia payable to an employee on opting for Voluntary Retirement under this Scheme would be paid in cash within 60 days from the date of his relieving. An employee whose offer for Voluntary Retirement under the Scheme is accepted will be eligible, apart from the ex-gratia defined above, to any benefit that would have been available to him upon superannuation as per the policy extant in the PSU prior to the date of notification of this scheme. It is clarified, however, that an employee shall not be eligible for both retrenchment

compensation

and

ex-gratia

under

this

scheme but shall have to opt for one of the two. General Conditions • Arrears of wages due to general revision of pay scales etc.

shall not be included in computing the eligible amount. • Only completed years of service shall be reckoned for arriving

at the minimum eligible service. • Fraction of service of 6 months and above shall be reckoned as

one year for the purpose of calculating the ex-gratia. Fraction of service less than 6 months will be ignored for the purpose of calculating the ex-gratia. • The salary shall be calculated on the basis of last salary drawn

by an employee/officer.

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VRS in public sector banks • No employee shall be allowed to withdraw the request made

for voluntary retirement under the scheme after it has been accepted by the Competent Authority. • The Competent Authority shall have absolute discretion either

to accept or reject the request of an employee seeking Voluntary Retirement under the scheme. The reasons for rejecting the request of any employee seeking Voluntary Retirement shall be recorded in writing by the Competent Authority. • All payments under the scheme and any other benefit payable

to an employee shall be subject to the prior settlement/repayment in full of loans, advances, returning of Govt.’s property and any other outstanding due against him and payable by him to the PSU concerned. • All payments made under the scheme shall be subject to

deduction of tax at source as per Income Tax Act 1961 wherever applicable. • An employee who seeks voluntary retirement under this

scheme shall not be eligible for re-employment in Govt., any PSU or any of its subsidiaries. A complete data/record, on website

of

all

those

employees

of

the

Public

Sector

Undertakings / Corporations, who have availed the VRS shall be retained. While making future recruitments no person out of these shall be retaken in service.

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VRS in public sector banks • In the event of the death of an employee, whose

request for voluntary retirement under the scheme has been accepted, the compensation, which would have become due and payable to the deceased employee, shall be paid to the person nominated to receive such dues. • The benefits payable under this scheme shall be in full and

final settlement of all claims of whatsoever nature, whether arising under the scheme or otherwise to the employee (or his nominee in case of death). An employee who voluntarily retires under this scheme will not have any claim against the PSU concerned of whatsoever nature and no demand or dispute or difference will be raised by him or on his behalf, whether for re-employment or compensation or back wages including employment of any of his relative on compassionate grounds. Eligibility criteria in general The companies can frame different schemes of voluntary retirement for different classes of their employees. However, these schemes have to conform to the guidelines prescribed in rule 2BA of the Income-tax Rules. The guidelines for the purposes of section 10( 10C ) of the Income-tax Act have been laid down in the rule 2BA of the Income-tax Rules.

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VRS in public sector banks

The guidelines provide that the scheme of voluntary retirement framed by a company should be in accordance with the following requirements, namely: •It applies to an employee of the company who has completed ten years of service or completed 40 years of age •It applies to all employees (by whatever name called), including workers and executives of the company excepting Directors of the company •The scheme of voluntary retirement has been drawn to result in overall reduction in the existing strength of the employees of the company •The vacancy caused by voluntary retirement is not to be filled up, nor the retiring employee is to be employed in another company or concern belonging to the same management •The amount receivable on account of voluntary retirement of the employees, does not exceed the amount equivalent to one and one-half months salary for each completed year of service or monthly emoluments at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. In any case, the amount should not exceed rupees five lakhs in case of each employee, and •The employee has not availed in the past the benefit of any other voluntary retirement scheme. .

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VRS in public sector banks

Application for voluntary retirement scheme

To ------------------------------------------------------------------------------------------------------------------------------------------Sub:- Application for Voluntary Retirement under Scheme notified vide Circular No……………………………………….. Dated………………

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VRS in public sector banks

Sir, 1. With reference to Circular no……………………………dated… ….......... on the above subject. I hereby opt for release under the Voluntary Retirement Scheme. 2. I agree with the terms & conditions as contained in the aforesaid circular. 3. I may kindly be relieved by ……………………….. in accordance with the above Scheme and the various benefits as provided therein may be paid to me on the date of release. My particulars as on date are as under:

Name Employee No. Father’s/Husband name Date of Birth Date of joining the Corporation Total service in the Corporation in Completed years Designation Scale of Pay Basic Pay DA Declared Home Town Details of Family Members residing with me (along with date of birth) 1. …………………………………………… 2. ………………………………………………… 3. ………………………………………………… 4. …………………………………………………

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VRS in public sector banks

Present Posting After retirement I wish to settle at : Thanking You Yours faithfully ( ) Name & Signature of the employee. Date: Name, Designation, Addresses and Signatures of two Witnesses: 1. …………………………………………………… 2. …………………………………………………… Certified that I have neither applied nor I have the intention to apply for employment in any Public Sector Enterprise/Governemtn Organization after Voluntary Retirement. ( ) Name & Designation of the employee. Date: FOR OFFICIAL USE The Application of Sh./Smt/Km…………………………………… ………… for release under Voluntary Retirement Scheme has been verified. The application of Sh./Smt./Km……………… …………………………. may be accepted/may not be accepted for reasons specified on a separate sheet.* Date ………… (Name/Designation and Signature of Head of the Department) * strike out whichever is not applicable.

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VRS in public sector banks

Forwarded for acceptance through Head of the Deptt. Application of Sh./Smt./Km. ……………………...……………. for release under VRS accepted/not accepted.* CMD/Head of the project. Date : ………………. * strike out whichever is not applicable.

A

s banking reform gathered speed and the prospect of government hand-outs diminished, it became clear that banks could no longer afford to be overstaffed.

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. On a

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VRS in public sector banks

conservative estimate, it could be said that the public sector banking system was overstaffed by roughly 1,00,000 people. Hiring and firing in the public sector banking industry is a highly unionised business, subject to protracted negotiation with the Indian Banks Association (IBA). After years of deliberation, in November 1999, the government sanctioned the release of the VRS to the IBA. Between November 15, 2000 and March 31, 2001, all public sector banks, except Corporation Bank, introduced VRS.

UNDER severe pressure from the staff of Corporation Bank to throw open an exit route, it considered the option of approaching to the Government to devise a special Voluntary Retirement Scheme (VRS) to allow only a highly selective offer. The special scheme seeked to limit the offer to only those sections of the staff that were identified as surplus after a thorough inhouse exercise on the bank's human resource requirement. Corporation Bank felt that it might be difficult for the bank to come up with a blanket VRS offer for its staff in the same vein as was done by other PSU banks since a recruitment drive is on at the other end. The bank was hiring fresh hands, both in the

19

VRS in public sector banks

officer and clerical grades, on account of its expansion plans drawn up with Life Insurance Corporation of India (LIC). According to sources, the bank had just completed the recruitment process for taking on its rolls an additional 125 officers and 160 clerical staff. The persons recruited will be deployed at the large number of extension counters that the bank proposes to open within the premises offered by LIC. "We are still unsure whether it is proper to offer a general VRS for the staff while a drive to recruit more has been taken up," Corporation Bank officials said. Corporation Bank was the only public sector bank that chose to stay out of the recent industry-wide VRS exercise that resulted in Government-owned banks shedding nearly 11 per cent of its earlier staff strength. Under the uniform VRS scheme devised by the Indian Banks' Association (IBA) for the PSU banks, the offer could be availed by all who met the criteria of minimum age or service requirement. However, the IBA scheme did provide the management with the final say in the matter of accepting a VRS application by allowing the bank to reject applications received from staff with specialised skills that the bank might find difficult to replace.

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VRS in public sector banks

Corporation Bank was not to be in the mood to avail this option since it wanted to avoid the possibility of big queues at the VRS window. "If we finally decide to have a VRS in the bank we might approach the Government for being allowed to make a special offer that would be limited to only those pockets which are identified as surplus," bank officials told Business Line. The following figure shows the percentage of employees who opted for VRS before March 2001 in 26 public sector banks. As seen below, the portion in red denotes the percentage of the number of employees who opted for VRS.

In 2000-01, the staff cost of all the 27 public sector banks (including Corporation Bank, which did not opt for VRS), was Rs

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VRS in public sector banks

21,050 crore. By 2001-02, staff costs had dropped to Rs 18,959 crore. 21500 21000 20500 20000 19500 19000 18500 18000 17500

Finally the Government then had cleared a uniform Voluntary Retirement Scheme (VRS) for the banking sector, giving public sector banks a seven-month time-frame. The IBA had allowed the circulation of the scheme among the public sector banks for adoption. The scheme was kept open till March 31, 2001. It was made operational after adoption by the respective bank’s board of directors. No concession was given to weak banks under the scheme. The scheme has been 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. VRS was implemented by 26 out of 27 public sector banks in 20002001. According to Indian Banks Association ( IBA) , the total staff strength in public sector banks at the end of March 2000 was 8,63,188 out of whom 1,26,714 or 14.7 per cent applied for VRS.

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VRS in public sector banks

About 80 per cent of the number of applications were accepted, and the staff relieved under VRS until December 31,2001 were 1,01,300. This constituted 11.7 per cent of the total staff strength at the end of March 2000. Banks were faced with cutthroat competition from the new private sector banks, state-owned banks have taken to the task of cutting costs very seriously. Despite a clear lead in terms of time, clients and network, public sector banks lagged far behind the new private sector in profitability. Their flab showed in their bottom lines. Banks having implemented VRS were State Bank of India, Bank of Maharashtra, Bank of India, Syndicate Bank, Oriental Bank of Commerce, Punjab National Bank, Union Bank of India, Indian Overseas Bank, Allahabad Bank, Andhra Bank, Standard Chartered Bank, Vijaya Bank, Punjab & Sind Bank, Indian Bank, Bank of Baroda, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, UCO Bank and United Bank. Speaking to a business magazine, Purushan Vava, chief manager, Punjab National Bank said, "The whole idea of implementing VRS is to save costs and improve our productivity." About 7,000 employees of Punjab National Bank opted for VRS. In

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VRS in public sector banks

a

special

arrangement

with

their

employees,

the

PNB

management had issued bonds equivalent to 50 per cent of the ex-gratia payment made to the VRS employees, encashable after 5 years. NS Nayak, general manager, Bank of India, agrees with Mr. Vava when he says, "With computerised systems having been installed, we realised we were carrying excess flab that was adversely affecting our bottom line. Therefore we decided to implement VRS." Mr Nayak disclosed, his bank had identified 10,000 excess people out of which 7,766 availed the VRS scheme. While 7,400 had already been relieved, the case of balance 366 was decided on disciplinary grounds. India's largest bank, State Bank of India, had also implemented VRS and about 21,000 employees out of a total of 233,000 opted for the scheme in fiscal 2001, according to SBI sources. Implementation of VRS also helped improve efficiency. RM Nayak, general manager, credit & international banking, Bank of Maharashtra told a business magazine, "Not only has our bank now become more customer friendly after implementing VRS, it is also more profit oriented largely because the average age of our employees has fallen to 49 from about 55 a few years ago." Similarly for Bank of India, the average age has come down to 49 from about 54 a few years ago.

24

VRS in public sector banks

Despite the fact that banks incurred huge capital costs and cash outflows during the ongoing VRS scheme, they simultaneously saved a lot of recurring costs and cash outflows which positively affected their profits and improved profitability. Paresh Kothari, an analyst on the banking sector with Khandwala Securities said, "Impact of VRS has already been discounted and factored in the current stock prices by the market but in the long run the overall impact on the share prices will be very positive." He said costs will come down and profits will go up, both bullish factors for stock markets. Clearly, cost cutting is set to have its impact on banks' profits as well as profitability and it is only a matter of time before the frenzy for bank shares returns to the stock markets. Said Mr Vava, of Punjab National Bank, "Bank employees who have availed of VRS are highly educated and experienced and have taken into account all consequences of opting for an early retirement." Agrees NS Nayak of Bank of India, "Bank employees are aware of the risks of early retirement but they are sufficiently educated and experienced not to make any serious mistakes" However, Shankar Rele, director, Dash Management Services Pvt. Ltd. thinks otherwise. Talking to a business magazine he said, "With a large number of employees expected to be freed from their regular jobs over a period of time through VRS, there is

25

VRS in public sector banks

bound to be an excess supply side situation in the job market. These people will have to find new avenues for themselves and to that extent this could lead to a social problem." Mr Rele may well have a point. There have been many instances in the past when people, with huge sums of money in hand have ended up losers because of their inability to manage the same well. It is a well-known fact that a lot of such sums have been lost in the stock markets. Mr Rele launched a project whereby he tried to help those who had availed VRS to find alternate employment opportunities. He used his association with the insurance, bank and the IT sectors to help such employee’s alternative employment. He also provided adequate training to the employees in new areas where required, with the help of psychologists.

The salient features Eligibility

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VRS in public sector banks • All permanent employees with 15 years of service or 40 years

of age • The following employees will not be eligible for this scheme:

Specialists officers/employees, who have executed service bonds

& have not completed it, employees/officers serving

abroad under special arrangements /bonds, will not be eligible for VRS. The Directors may however waive this, subject to fulfillment of the bond & other requirements. •Employees

against

whom

Disciplinary

Proceedings

are

contemplated/pending or are under suspension. •Employees appointed on contract basis. Any other category of employees as may be specified by the Board. Amount of Ex-gratia 60 days' salary (pay plus stagnation increments plus special allowance plus dearness relief) for each completed year of service or the salary for the number of months service is left, whichever is less

Other Benefits

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VRS in public sector banks • Gratuity

as per Gratuity Act/Service Gratuity, as the case

maybe. • Pensions

(including

commuted

value

of

pension)/bank's

contribution towards PF, as the case may be. • Leave

encashment as per rules.

Other features •It will be the prerogative of the bank's management either to accept a request for VRS or to reject the same depending upon the requirement of the bank. •Care will have to be taken to ensure that highly skilled and qualified workers and staff are not given the option. •There will be no recruitment against vacancies arising due to VRS. •Before

introducing

manpower

VRS

planning

officers/employees

who

,banks

and can

must

identify be

complete

the

considered

their

number

of

under

the

scheme. •Sanction of VRS and any new recruitment should only be in accordance with the manpower plan.

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VRS in public sector banks

Funding of the Scheme • Coinciding with their financial position and cash flow, banks

may decide payment partly in cash and partly in bonds or in installments, but minimum 50% of the cash instantly and remaining 50% after a stipulated period. • Funding of the scheme will be made by the banks

themselves either from their own funds or by taking loans from other banks/financial institutions or any other source. Sabbatical Here, the employees were allowed to go on a long leave without pay with an aim to cut costs. An employee/officer who may not be interested to take voluntary retirement immediately can avail the facility of sabbatical for five years, which can be further extended by another term of five years. After the period of sabbatical is over he may re-join the bank on the same post and at the same stage of pay where he was at the time of taking sabbatical. The period of sabbatical will not be considered for increments or qualifying service for person, leave, etc. To minimise the immediate impact on banks, the scheme allowed them the stagger the payments in two instalments, with a minimum of 50 per cent of the amount to be paid in cash

29

VRS in public sector banks

immediately. The remaining payment can be paid within six months either in cash or in the form of bonds. Treatment of VRS expenditure The Institute of Chartered Accountants of India (ICAI) urged the Government to allow the expenditure incurred under voluntary retirement schemes (VRS) as a deductible expenditure to the extent they are written off in the profit and loss account. The institute

advocated

such

a

treatment

irrespective

of

whether the VRS amounts paid constituted the capital expenditure or not. The ICAI pointed out that many public sector enterprises as well as banks who implemented VRS had to make payments of huge amount to the employees who opted for VRS. ``There will be a large outflow of cash and already banks are requesting the Central Government to provide them with necessary funds for the purpose of implementing VRS. It is logical therefore to allow the entire amounts paid on such schemes as an allowable deduction for the purpose of computing income of the respective enterprises'', the ICAI said in a post-Budget memorandum. The Finance Bill 2001 proposed a new Section 35DDA which provides for amortisation of expenditure incurred over a period of five years. Accordingly, such expenditure is deductible in five equal installments.

30

VRS in public sector banks

According to ICAI, the provision in the present form would place `great strain' on the cash resources of an enterprise which is implementing a VRS as it would also have to pay income tax at the applicable rate on the unamortised portions of such payments . On the proposed changes in the due dates for filing of income tax returns, the ICAI has suggested that for all those cases where no statutory audit is required the returns may be filed by July 31 and for those cases where statutory audit is required the returns may be filed by October 31 for Assessment Year 2001-02. For subsequent years, the institute recommended that the date for those cases where statutory audit is required may be fixed as September 30. As regards the proposed provisions which would bring the large amounts of non-competing monies received by employees in to the tax net, the institute has pointed out that `where the assessee receives such amount before joining employment, the charging section 15 may not be able to cover such a situation in the absence of employer-employee relationship''. ICAI has urged the Government to address this issue through suitable changes. But when they were planning to write off the VRS expenditure over a few years, an expert opinion provided by the Institute of Chartered Accountants of India (August 2000) proved to be a proverbial spoke in the wheels. The opinion stated that out of

31

VRS in public sector banks

the components of the VRS package, the lump sum paid on ex gratia could alone be treated as deferred revenue expenditure

and

the

other

components

have

to

be

expensed straightway. For the banks, it was a strict `no no' as it would impact their profits substantially. Hence they wanted their regulator to prescribe an accounting treatment so as to take precedence over the opinion given. The regulator readily obliged and through its circular (dated January 30, 2001), allowed the banks to defray the entire component of the VRS package including outflows on account of gratuity and leave encashment to be treated as deferred revenue over a period five year period. Sensing that the tax deductibility on account of VRS would be acceptable to the bankers if provided over a period (even though the expenditure could be straightway claimed as revenue), the Government for its part brought in Section 35 DDA into the Act which provided tax deductibility over five years. With the banks and the Government having sewed up all the corners, the question arose as to the plight of the retirees. As a sop to them, Section 10 (10C) was brought into the Income tax Act, wherein any amount received at the time of retirement was exempt to the extent of Rs.5 lakhs. This

32

VRS in public sector banks

was

apart

from

the

gratuity

and

leave

encashment

benefits available. "Even after the VRS is implemented, some of the banks are still over-staffed. Productivity is still low. Ideally, the VRS should be an annual phenomenon," said the chairman of a large public sector bank. Incidentally, the finance ministry stayed away from the entire exercise. The Indian Banks' Association devised the formula, which was accepted by the industry after a formal vetting of the banking division of the ministry. Employees over 45 years of age were eligible for the 'generous' scheme

which

offered

two

months'

salary

for

every

year

completed or the residual service period, which ever is lower. Post VRS, the public sector banks were finding it tough to run operations efficiently as there were staff shortages at some pockets. Plans were afoot to restructure the organisation by merging or closing some branches and abolishing at least one tier of the organisational structure (either zonal or regional offices) to avoid duplication of work and slow decision making. Nevertheless, productivity has improved due to downsizing. At Punjab National Bank, for instance, business per employee has risen by as much as 34 per cent to Rs 14 million in the last one year. PNB chairman SS Kohli, who is also the chairman of the Indian Banks' Association, attributes the growth in BPE to the

33

VRS in public sector banks

success of the separation scheme. Together, the 27 public sector banks showed a 26 per cent growth in BPE, which rose to Rs 15 million at the end of March 2001 as against Rs 12 million in 19992000.

M

any companies have been providing their employees the option of voluntary retirement. This brings for the employees a pile of money, the amount of which

depends on their present salary status, years of service, and their age. With the large sum comes an equally large tax liability. And employees are not often clear as to the tax provisions regarding Voluntary Retirement Scheme (VRS). They also have to depend on the employer for tax deduction at source on such payment. Numerous judgements have been passed in the recent past by the Madras High Court, and various tribunals have provided relief to employees opting for VRS.

34

VRS in public sector banks

When the public sector banks came out with a scheme to reduce their staff strength, they structured the financial package in such a way that they had the best of the deals. They wanted minimum impact of such payouts on their financials, sought tax deductibility of the expenditure and did not want the payout to strain their liquidity. The components of the package under the Voluntary Retirement Scheme (VRS) included ex-gratia, gratuity, pension, leave encashment and in some cases travel and transportation reimbursement. The banks were not worried about the tax deductibility of the expenditure as they had several court decisions to support their claim. The Madras High Court had held that "payments made to employees by way of gratuity, bonus, retrenchment compensation or compensation for termination of service, whether under compulsion of statute or voluntarily, cannot be said to be unconnected

with

business,

or

as

not

being

commercially

expedient, so long as the quantum of the payment is reasonable, having regard to all circumstances relevant to the business enterprise. Such payments have ordinarily to be regarded as payments made to facilitate the carrying on of the business of the assessee".

35

VRS in public sector banks

The Madras High Court on the aspect of VRS in had held, "When the payment is made for the purpose of retrenchment of workers it was for the purpose of reducing the staff and to bring about a reduction in the wage bill as well. Therefore these were matters of management

pertaining

to

business

considerations

and

expediency and the expenditure incurred by the assessee in this regard was for the purpose of business and also with a view to maintaining good relationship with the labour and that the expenditure had to be considered as having been laid out wholly and exclusively for business purposes of the assessee. Therefore the sum paid under VRS was deductible."

It has also been held by the Calcutta High Court that "the payment of compensation to induce workmen to retire prematurely is an item of expenditure incurred by the assessee company on the ground of commercial expediency in order to facilitate carrying on of business and is revenue expenditure and an allowable deduction.'' But perhaps fearing a substantial drop in tax collection, the Central Board of Direct Taxes (CBDT) came out with a Circular (January 23, 2001) whereby the expenditure on VRS was termed capital in nature on the ground that there was an enduring

36

VRS in public sector banks

advantage to the tax payers. All said and done, this circular was on shaky grounds. There were enough case laws which held that the circulars cannot take away what is legitimately available under the law. There were also decisions which stated that the Circulars from CBDT would not bind the courts or the tax payers. Again various courts including the Supreme Court maintained that circulars cannot preempt a judicial interpretation. Armed with the above, the banks were not too worried about the CBDT's circulars Also the retirees thought that the lump sum paid, having been based on the years of service served or remaining, as the case may be, or as a payment in the nature of profits in lieu of salary would fall within the ambit of Section 89(1) of the Income Tax Act, which allowed a tax relief to lessen the burden of tax which arises because of income relatable to a few years being received in one stroke. In this scenario, banks wanted to cover one more angle in the process, which was to ease the strain on their liquidity. Hence they agreed to meet their commitment to the retirees in annual installments and in some cases through issue of bonds. It was then that all hell broke loose. Since the banks paid the compensation in instalments, the exemption under Section 10 (10C) of the Income-tax Act 1961 was restricted to first such annual instalment and the retirees were

37

VRS in public sector banks

denied the promised Rs. 5 lakhs exemption. To a great extent, the instalments which followed had to suffer tax with no exemption whatsoever. Secondly, in some cases the tax department argued that the annual instalments mainly meant the method of payment but the income being accrued in its entirety in the year of retirement, the entire compensation would have to suffer tax in that year. The plight of the retirees was indeed sorrowful. , the law makers wanted to restrict the exemption on the amount received to the extent of Rs.5 lakhs in a person's career and hence introduced certain words to that effect. These have been twisted out of shape and the tax relief under Section 89(1) claimed by the retirees on account of their tax burden going up because of the VRS package was also denied. It should be noted that while the banks and the Government took enormous care to preserve their self interests, the retiree who was without a job, with returns on his meagre investments dwindling rapidly and with no social security cover, was left to fend for himself. Neither his former employer nor the union to which he belonged nor the government which supported such grandiose schemes to keep with the times, have come to their rescue till date. All that they have witnessed is strict and cynical interpretation of law and

38

VRS in public sector banks

nothing else. Section 10(10C) of the Income Tax Act, 1961 provides for a one-time exemption to an employee opting for voluntary retirement or termination of his service, in accordance with any scheme of voluntary retirement to the extent of Rs 5,00,000. Further, where an exemption has been allowed to an employee under this Section in any year, no further exemption will be allowed under this Section in relation to any other year. The guidelines in respect for claiming exemption under Section 10(10C) are provided under Rule 2BA of the Income Tax Rules, 1962. As per Rule 2BA, exemption under Section 10(10C) is available to an employee only if the scheme of voluntary retirement framed by the company or authority or co-operative society or university or institute, as the case may be, or if the scheme of voluntary separation framed by a public sector company, is in accordance with the specified requirements which are mentioned as under:

Eligibility for Rs 5-lakh exemption The Voluntary Retirement Scheme has to meet the following requirements: • It will apply to an employee who has completed 10 years of

service, or is aged over 40 years;

39

VRS in public sector banks • It applies to all employees (except directors) including workers

and executives of a company or of an authority or of a cooperative society; • The scheme of voluntary retirement or voluntary separation

has been drawn to result in overall reduction in the number of the employees; • The vacancy caused by the voluntary retirement or voluntary

separation is not to be filled up; • The retiring employee of a company shall not be employed in

another

company

or

concern

belonging

to

the

same

management; • The amount on account of voluntary retirement or voluntary

separation of the employee does not exceed the amount equal to three months' salary for each completed year of service, or salary at the time of retirement multiplied by the number of months of service left before the date of his retirement or superannuation. In case of a public sector employee opting for voluntary retirement, the requirement that he should be at least 40 years of age or should have completed 10 years of service, would not apply if the proceeds are as per the scheme of voluntary separation framed by such public sector company.When an employee opts for

40

VRS in public sector banks

voluntary retirement he has to consider the taxability of all sums received.

Generally

the

proceeds

fall

under

the

following

categories: (i) Gratuity: In case of emloyees of government and employees of local authorities, the gratuity is totally exempt under Section 10(10C) of Income Tax Act. For other employees, gratuity is exempt under Section 10(10C) up to Rs 3,50,000. Any gratuity in excess of Rs 3,50,000 shall qualify for rebate under Section

89(1).

(ii) Leave Encashment: This shall be exempt under Section 10(10AA) to the extent specified therein. Section 10(10AA) grants exemption for leave encashment in respect of earned leave at the credit of the employee at the time of his retirement, on superannuation, or otherwise. Voluntary retirement shall be treated as retirement otherwise. (iii) Provident fund:

Payment received from provident fund shall be exempt under Section 10(11) of the Income Tax Act.

41

VRS in public sector banks

(iv) For sums other than those referred to in (i), (ii) and (iii), exemption under Section 10(10C) is available to the extent of Rs 5,00,000. There was a lot of controversy about whether relief under Section 89(1) should be available to employees opting for voluntary retirement for an amount in excess of exemption of Rs 5, 00,000 under Section 10(10C). According to the provisions of Section 89, where an assessee receives any money in the nature of salary because of which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, the assessing officer shall - on an application made to him in this behalf - grant such relief as may be prescribed.

42

VRS in public sector banks

Rebate for VRS over Rs 5 lakh • Compute the average rate of tax on the total income including

VRS receipts in excess of Rs 5 lakh in the year of receipt. • Find out the tax on payment received under VRS in excess of

Rs 5 lakh at the average rate of tax computed in the first step. • Add one third of the amount received under VRS in excess of

Rs 5 lakh to the total income of each of the three preceding years, and compute average rate of tax for these three preceding years. • Find out the average of the three tax rates computed in the

third step; compute tax on the average rate on the amount received under VRS in excess of Rs 5 lakh. • The difference in tax computed in the second and fourth steps

shall be the relief under Section 89(1). Below

mentioned

are

the

summarized

income

tax

provisions that the employee has to work out while opting for

voluntary

retirement

43

scheme.

VRS in public sector banks

Recently the Madras High Court decided in favour of the assessee, and held that relief under Section 89(1) is available to the employees opting for voluntary retirement, over and above the exemption of Rs 5 lakh under Section 10(10C). The Madras High Court - held that if an employee receives compensation at the

44

VRS in public sector banks

time of resignation, the amount could be regarded as salary, and the assessee would be entitled to the relief provided under Section 89. This principle rendered in the case of resignation would apply as much to the case of voluntary retirement of an employee from service. Further, the Income Tax Appellate Tribunal - upheld the same contention, and held that relief under Section 89 is available over and above Rs 5-lakh exemption under Section 10(10C). The example in 'Rebate for VRS over Rs 5 lakh' alongside shows you how the relief can be computed. Moneys in the nature of salary refers to amounts received in arrears or in advance and includes receipt in any one financial year, of salary for more than twelve months or any payment which is treated as profit in lieu of salary being paid in arrears. The receipts on voluntary retirement by an employee are taxed in his hands under Section 17(3), that is profits in lieu of salaries. Thus, the relief under Section 89 is also applicable to employees opting for VRS after exemption under Section 10(10C) has been exhausted. As mentioned earlier, VRS proceeds can run into large sums of money. Therefore it is important that one utilises the benefits available under the Income Tax Act.

45

VRS in public sector banks

W

Investment of VRS amount ith the advent of the Senior Citizens Savings Scheme, those opting for retirement, voluntary or otherwise, suddenly had a window of opportunity.

Basically, the SCSS are open for those opting for retirement provided they are 55 years of age. However, the moot question that such people face is obvious -- should they be opting for the VRS (voluntary retirement scheme) in the first place? Life presents very few occasions to an individual where a decision taken has a great impact on not only his own future but also that of his family members. An offer of VRS is one such important occasion.. Let us take a live case of one such person, whose particulars are provided in the table.

46

VRS in public sector banks TABLE (a) Age Service put in Residual service Current gross pay

45 years 7 months 26 years 2 months 14 years 5 months Rs 15,668

Analysis The ex-gratia is exempt up to Rs 500,000.Assuming that the rest of

Entitlement for VRS Rs 745,308

the amount is subject to tax at the

Ex gratia PF Leave encashment Gratuity Pension commutation Total Monthly pension

highest rate of 33.66 per cent, the

Rs 346,910 Rs 151,050 Rs 299,565 Rs 114,328 Rs 16,57,161 Rs 6,138

amount remaining in hand works out at Rs 662,737. •

[745,308

-

500,000

=

245,308] •

[33.66% of 245,308 = 82,571]

•

[745,308 - 82,571 = 662,737]

Since the rest of the benefits suffer very little tax, if any, the total investible amount in hand is Rs 15, 74,590. Now the question is, should this person continue in service or should he opt for the retirement scheme? For the sake of comparison, we shall ignore the taxes and the taxplanning strategies that can be adopted.

47

VRS in public sector banks

If VRS is taken For abundant precaution, we shall assume a very conservative interest rate of 8 per cent p.a., payable monthly, even when it is possible to park investible funds in avenues yielding 9 per cent p.a., payable quarterly. At 8 per cent, on Rs 15,74,590 the interest will be Rs 10,497 every month. Add to that the pension. The total monthly income will be Rs 16,635, which is Rs 967 more than the salary he is earning at present. The future value of an annuity of Rs 967 received per month, at the end of 14 years and 5 months (which is his period of residual service) is Rs 3,14,905. Now, one immediate and obvious conclusion that the above analysis throws out is that the employee will not be required to sacrifice his financial lifestyle in case he opts for the VRS. This is because his gross pay was Rs 15,668 per month, whereas the aggregate of interest on the VRS amount and the pension works out to Rs 16,635. Isn't it strange that a person's income can be greater when he isn't working than when he is? However, one point hitherto not considered is that, if the employee continues in his service, his salary will rise with time and consequently, there will be incremental effects on gratuity, Provident Fund, etc.

48

VRS in public sector banks

But on the other side of the coin, there will be no ex-gratia of Rs 6,62,737 plus the future value of annuity of Rs 3,14,905, aggregating to around Rs 9.75 lakh (Rs 975,000). The possibility of the incremental values of these benefits taken together with the increase in salary at the time of normal retirement being substantially higher than the ex-gratia offered right now certainly looms large.However, the following additional factors have to be taken into consideration before taking the decision: Time is money We know about the time value of money. But have we considered the money value of time? This is a very important aspect, neglected by many. Money has time value that is expressed in terms of interest. Similarly, time has money value. Unfortunately, this cannot be accurately quantified and will heavily depend upon the future events such as getting another job, starting a business, pursuing a rewarding hobby, etc.

49

VRS in public sector banks

Residual benefits Most employers continue to give some benefits to their retired employees. These may be in terms of annual domiciliary medical expenses,

hospitalisation

expenses

with

a

high

ceiling,

continuation of housing loan, allowing the employee to retain their provident fund dues with their employer for a specified period, etc.. . Till about an year ago, the voluntary retirement scheme was an anathema in the public sector banking industry, possibly the most over-manned white-collar citadel ruled by trade union leaders.

50

VRS in public sector banks

MANAGEMENT VS EMLOYEES Various bank unions have not been in favour of VRS being implemented but they could do little because the amount of money offered lured away their colleagues like honey attracts bees. Said Mr Shanbhag, general secretary of PNB bank union, "We are not happy. We had all along been opposing VRS because we feel that our colleagues could face problems post VRS. However we could do little because the government enforced the scheme and employees lapped up huge sums of money they were offered to them by the managements." Mr Shanbhag said post VRS, replacements have been slow to come by, which exerts additional pressure on remaining employees. Bank managements have become jittery over the impact of voluntary retirement schemes on the officer cadre, with trends pointing to a depletion in rural branches, the north-east and even in metros like Mumbai. Several members of the Indian Banks Association (IBA) are now worried that the voluntary retirement schemes announced by a host of banks will leave them with a skewed staff-officers ratio.

51

VRS in public sector banks

According to a sample survey of the VRS applicants at various public sector banks, over 80 per cent are officers. At some banks, it is 85 per cent. The survey has also pointed out that over 80 per cent are from officers posted at north eastern states and in rural branches.

"Now, if a bank approves the VRS applications of even half the number of officer-applicants, it will be forced to close down a substantial number of its rural and north east branches," pointed out an associate of IBA. Around 15 public sector commercial banks have so far announced VRS. Among them are Allahabad Bank, Bank of India, Bank of Baroda, Bank of Maharashtra, Canara Bank, Dena Bank, Indian Bank,

Oriental

Bank

of

Commerce,

Punjab

National

Bank,

Syndicate Bank, Uco Bank and United Bank of India. Meanwhile, the United Forum of Bank Unions, a group of nine major trade unions, has done its own survey of the factors attracting officers to the VRS. The UFBU's co-convenor, Mr Ashoke Dutta, told The Financial Express that the Union government had done a very effective silent campaign to the effect that the retirement age of PSU officers may be lowered to 58 years from 60 now. The government cannot bring down staffs' retirement age, since they have been

52

VRS in public sector banks

appointed through agreements that specify a retirement age of 60 years. But the officers are appointed via notifications, with the government retaining the option to lower or increase the retirement age. According to Mr Dutta, in such a situation, the officers find a VRS the most suitable option. Officers opting for a VRS get benefits on the basis of a retirement age of 60. Officers who stay on may lose two years of entitlements in case the retirement age is lowered, Mr Dutta pointed out. Another reason for the popularity of the VRS with officers is that their actions are subject to scrutiny by outside agencies like the Central Bureau of Investigation (CBI). The staff members' actions are out of the purview of the CBI. "So officers prefer to opt for a VRS at the first chance rather than risking their service for some more years. In fact, it has been the fear psychosis that has prompted the officers to go for the VRS," Mr Dutta added. These factor have played an especially important role at banks like United Bank of India, Uco Bank and Indian Bank, the so-called weak banks. Officers of these three banks were uncertain about their future and therefore rushed for the VRS.

53

VRS in public sector banks

According to the president of the All India State Bank of India Officers' Federation, Mr BB Das, apart from north east and rural India, the number of VRS applications among the officers has been quite high in Mumbai and Bangalore. "This is because the job prospects in these two cities are bright and the VRS has paved the way from the PSU banks to lose their cream to private organisations," he said. He also said that the officers - unlike the staff members - are liable to be transferred any time and this factor has also played a role in the VRS issue.

STATE BANK OF INDIA EMPLOYEES

While the voluntary retirement scheme (VRS) package of State Bank of India (SBI) benefited about 22,000 employees of the bank, a significant number of officers about 11,000 were the dejected lot since their applications for VRS package was rejected by the management. About 11,000 SBI employees of the officer cadre were not given the package despite making an application. They then formed an association _ SBIVRS Optee Officers'

54

VRS in public sector banks

Association _ to articulate their case and request the management

and

the

Government

to

consider

their

applications. The

President

of

the

SBIVRS

Optee

Officers

Association,

Hyderabad, Mr Y.L. Marianna, told Business Line that apart from various initiatives, there was no other option but to go to the court as all their efforts to hold parleys and address the problem did not materialise.'' Mr Marianna said that the congregation resolved to go ahead with its action plan to achieve VRS to all its member applicants who had been denied the package by the SBI management on the ground that they were below 55 years of age. The association maintained that the SBI management abysmally lacked human touch in its manpower planning and this resulted in indelible

frustration

among

its

officers

community.

This

accumulated frustration and identity crisis had resulted in many of the employees opting for the VRS package. They opined that SBI did not live up to its image of being the largest bank, while major banks, including Punjab National Bank, Bank of India, Canara Bank, Syndicate Bank, Andhra Bank and Dena Bank, had a very smooth VRS sail and granted it to almost all of its applicants ranging between 15 and 22 per cent of the total staff strength.

55

VRS in public sector banks

The association maintained that the SBI extended the VRS package to barely about 10 per cent of the staff working to about 22,000 out of 2,33,000 employees. Of about 56,000 in the officer cadre, about 18,000 had opted for the VRS. However, the bank appro ved the package for about 7,000 officers only, Mr. Marianna maintained. While some of the loss-making banks had managed to come up with attractive VRS packages, the association noted that SBI and Bank of Maharashtra were among the two major banks which did not live up to their true status and limited the percentage of optees. The aggrieved members of the association instituted suits in several courts across the country. The management had to take stock of the interim orders of the Guwahati and Bangalore High Courts which came in favour of the employees, the association said. While the association resolved to take up the matter with the Government, it expressed a view that the trade unions, have always drawn support from the employees They said that the threat of bringing down the retirement age from 60 years to 58 years was putting a lot of pressure on senior bank officials to opt for the scheme.

56

VRS in public sector banks

In December 2000, SBI had formed a joint venture with the French insurance company Cardiff, for entering the life insurance

business.

The

unions

questioned

the

logic

behind diversifying the business and cutting down the staff

strength.

They

argued

that

this

move

would

significantly increase workforce burden and, consequently, adversely affect customer service.

Justice Alok Chakraborty of the Calcutta High Court has dismissed a writ petition filed by the SBI (VRS) Optee Officers Action Group (Bengal), challenging the decision of the bank authority not to accept the voluntary retirement scheme (VRS) of all the officers of the bank. In the petition it was alleged that the bank authority illegally had not accepted the VRS for all the officers and that it rejected the prayer for VRS without showing any reason. The bank stated that if all the employees take VRS, the functioning of the bank will collapse and that it is not in a position to face the financial burden of over Rs 500 crore to meet the claim of the writ petitioners. CORPORATION BANK EMPLOYEES

57

VRS in public sector banks

When the option for VRS was granted to the public sector banks, all the banks except corporation bank accepted it. Officers of the Corporation Bank were set to write a new chapter in industrial relations history by demanding an exit policy in the bank. They went on a one-day token strike on March 30 2001 to press for their demand for the introduction of a voluntary retirement scheme. These officers were left out when the public sector banking industry introduced the first ever VRS in 2000 which saw 91,970 bank employees accepting VRS. This accounted for 11 per cent of the total number of bank employees. Except for Corporation Bank, the entire industry (26 banks) introduced the scheme in 2000 and around 15 per cent of the total work force or 1,26,280 employees had applied for VRS. Corporation Bank appointed a committee of executives to look into the unions' VRS demand. The committee - which was assessing the manpower requirement of the bank - submitted its report to the board of the bank in May 2001.

58

VRS in public sector banks

Corporation Bank had an employee strength of close to 11,000 out of which 8,315 were officers. The management was resisting the demand for the introduction of a VRS as the bank needed a bigger work force to support its expansion plans. In fact, the bank was in the process of recruiting around 600 officers and clerks over the next few months. Industry sources, however, indicated that the bank management was then open to the idea of a VRS - with some riders. BANK OF BARODA

On the same day (March 30), Bank of Baroda employees too went on a

striking work for an altogether different reason. Four

employees' associations (All-India Bank of Baroda Officers' Association, Federation,

All-

India

All-India

Bank

Bank

of

of

Baroda

Baroda

Employees'

Employees'

Co-

ordination Committee & Eastern Regional Council of Bank of Baroda Employees' Association) called for a strike protesting the bank's move to rope in a consultancy firm

59

VRS in public sector banks

to draw up a business strategy. Initially, the firm was appointed to chalk out an infotech strategy only. This

was

just

the

beginning.

PSU

banks

needed

to

implement at least another round of VRS to reach a respectable level of employee productivity.

60

VRS in public sector banks

H

istory of VRS up to the date of implementation by the respective PSBs, which commenced on 01.09.2000, was common for all the banks. This was because the

initiative for action was with the Government of India, Finance Ministry and the environment that affected banks was externally oriented creating nearly identical problems for all the banks, the difference being only in magnitude. The incidence of individual banks scheme became visible only after the initiative was shifted to the respective banks to implement the scheme. In other words the difference in VRS between bank to bank manifested only at the point of implementation, i.e. when the results were achieved. The package differed from bank to bank but had been broadly structured around the "model" prescribed by the IBA. There was no difference in the eligibility criteria of officers or the quantum of compensation. Individual banks had discretion in defining the category of employees, who were to be kept outside the preview of VRS and who were not eligible to apply for the same. Individual banks also had the discretion regarding the mode of disbursement. The model proposed that banks offer to pay 50 per cent of the settlement in cash and the balance in bonds with a lock-in period of three years. However State Bank of India (SBI), the largest Indian bank, offered to settle fully in cash. According to figures available by early February, of the

61

VRS in public sector banks

estimated one lakh and odd employees who offered to accept the package, at least 33,000 were from the SBI. However SBI has accepted VRS applications of only 20784, of which there were 6,694 officers, 11,271 clerical staff and 2,819 subordinates. On a bank-wise break-up, SBI's estimated cost for VRS was the highest at Rs 1,500 crore. And average cost per employee worked out to Rs.6.52 Lacs. It was claimed that operating expenses for SBI in 2001-2002 increased by only 3.64% mainly due to savings in staff cost after Voluntary Retirement Scheme in the last fiscal year. The SBI is the largest bank in India in terms of network of branches, revenues and workforce. It offers a wide range of services for both personal and corporate banking. The personal banking services include credit cards, housing loans, consumer loans, and insurance. For corporate banking, SBI offers infrastructure finance, cash management and loan syndication. Over the years, the bank became saddled with a large workforce and huge NPAs. According to reports, staff costs in 1999-2000 amounted to Rs 4.5 billion as against Rs 4.1 billion in 1998-99. Increased competition from the new private sector banks (NPBs) further added to SBI’s problems. Though SBI had 9,000 branches, a mere 22% of those (1935 branches) were connected through Internet. SBI’s net profit per

62

VRS in public sector banks

employee was Rs 0.43 million and SBI’s NPA level was around 7.18% The table given below shows the data of other banks for comparison with SBI’s. TABLE

I

A COMPARISON BETWEEN SBI & SOME NPBs PROFIT BANK

SBI HDFC UTI BANK ICICI BANK GTB

NPAs/NET ADVANCES

7.18% 0.77% 4.71% 1.53% 0.87%

PER EMPLOYE E (Rs in Million) 0.43 0.96 0.69 0.78 1.2

From the above table it is clearly indicated that SBI was far from the standards that could be arrived from analyzing other banks NPA’s and profit per employee. Analysts remarked that the very factors that were once hailed as the strengths of SBI - reach, customer base and experience - had become its problems. Technological tools like ATMs and the Internet had changed banking dynamics. A large

63

VRS in public sector banks

portion of the back-office staff had become redundant after the computerization of banks. To protect its business and remain profitable, SBI realized that it would have to reduce its cost of operations and increase its revenues from fee-based services. The VRS implementation was a part of an over all cost cutting initiative. SBI faced a lot of protest against VRS from its employees due to varying reasons. Inspite of all such protests, SBI received around 35,000 applications for the VRS. Analysts pointed out that many bank employees opted for the VRS due to the better employment prospects. SBI had not anticipated such a huge response to the scheme. While the VRS was mainly aimed at reducing the clerical staff and sub-staff, the maximum number of optees turned out to be from the officer cadre. The clerical staff was reluctant to go for the VRS due to the low employment opportunities for them. According to reports, the number of applications from officers stood at 19,295, which meant that over 33 per cent of the total officers in the bank had sought VRS. While announcing the VRS on December 27 2000, SBI had merely stated that the management would relieve only those officer cadre applicants who had crossed the age of 55 years. The bank also issued circular barring treasury managers, forex dealers and a host of other specialized personnel, from seeking VRS. Employees who had not served rural terms were also

64

VRS in public sector banks

barred from opting for the scheme. The VRS was also not open to employees who were doctorates, MBA’s, Chartered Accountants, Cost & Works accountants, postgraduates in computer applications. Another category barred from the VRS consists of employees who have received training at any Indian Institute of Management, the National Institute of Business Management, the Xavier Labour Relations Institute and trainers who have undergone training on behavioural

sciences.

Technical

training

is

also

a

disqualification - applying to those trained in computer or information

technology

related

areas

at

specialised

external institutes in India or abroad and those with training in derivatives. According to highly placed SBI sources, the original VRS and the restrictions that followed have left hardly any significant department open to the VRS. A source said that the aim of the VRS was to reduce the large numbers of the award staff but most of the applicants were officers. "So SBI came out with tough stipulations to discourage the officers," an SBI official said. In another circular, SBI mentioned that any break in service (i.e. leaves availed on a loss of pay basis) would not be taken while calculating the service period. The bank also restricted the loan facilities to the personnel who had opted for the VRS. If an employee wished to continue a housing loan after accepting VRS, he was asked to pay interest at the market rate. After these

65

VRS in public sector banks

restrictions were introduced, only 13.4% of the officers were left eligible for VRS instead of the earlier 33%. The conditions laid down by the management faced strong criticism from the officers who had opted for the VRS, but who could not meet the prescribed criteria. They alleged that the bank was practicing discrimination in implementation of the scheme and that no other banks had implemented such policies and denied the opportunity of VRS to officers who were willing to avail the scheme. While

the

bank

authorities

considered

SBI’s

VRS

agenda

meticulous, sources inside the bank strongly believed that the bank should have phased out its VRS implementation because of the disruptions it caused. For instance, in some cases, the bank’s managerial employees had to share some clerical functions, which delayed the clearance process. Irate customers of SBI complained of the increased waiting time for cheque clearance since there was shortage of manpower. SBI faced flak not only for customer service but also for interest lost on money transferred from various branches as delays in remittance of cash snowballed to over five days with SBI too understaffed to clear transactions in time. In normal cases, the transfer takes place on the same day or the next day.

66

VRS in public sector banks

According to media reports, some of SBI’s problem centres were Pune, Baroda, Surat, Panjim and, to a lesser extent, Jalandhar and Jamshedpur. But one of the bank’s human resource executives claims that there were no identified problem centres as such and that the media reports were inaccurate. He concedes, however, that the VRS resulted in some minor regional imbalances, but these were tackled by SBI by rotating the administrative staff to various branches wherever there was a need to do so. SBI’s manpower problems were shared by all public sector banks. State Bank of India is not only the largest of the Indian Banks, but also it is the biggest Institution at the Global level in terms of manpower employed. In the period immediately before VRS implementation it employed 237504 officers and other employees. Through the application of VRS it has shed its work force by 20784 (8.7%). Cadre-wise the position is as under. Particulars Total Strength Those opted VRS %age VRS to Total Strength

Officers 60536 6694 11%

Clerical 117184 11271 9.62%

Subordinate 59784 2819 4.72%

Aggregate 237504 20784 8.7%

However State Bank of Travancore is a subsidiary of SBI and is of much smaller size. It has branches mainly spread in Kerala. The subsidiaries of SBI implemented VRS subsequently after it was implemented by the SBI and other Nationalised Banks. SBT had 13000 & odd number of employees (inclusive of all cadres). It incurred an expenditure of Rs.57 Crores towards compensation

67

VRS in public sector banks

payment under VRS and relieved 915 employees, which is approximately 7% of the staff-strength as detailed hereunder Particulars Total Strength Those opted VRS %age VRS to Total Strength

Officers 3150 534 16.96%

Clerical 7023 299 4.28%

Subordinate 2964 82 2.77%

Aggregate 13137 915 /TD>7%

SBI took a hit in its profits by charging VRS expenses to the tune of Rs 8.8 bn in FY01. The bank's profits excluding VRS however jumped by 22%, in line.. (Rs m)

FY00

FY01

Change 4QFY00 4QFY01 Change

Interest Income

222,009 260,034 17.1% 60,758

74,446

22.5%

Other Income

35,693 40,178 12.6% 11,322

14,782

30.6%

Interest Expenditure

152,726 177,556 16.3% 38,184

50,390

32.0%

Operating Profit (EBDIT)

69,284 82,478 19.0% 22,574

24,056

6.6%

Operating Profit Margin (%) 31.2% 31.7%

37.2%

32.3%

Other Expenditure

62,952 74,156 17.8% 19,008

24,319

27.9%

Profit before Tax

42,025 48,500 15.4% 14,888

14,518

-2.5%

Provisions & Contingencies 11,725 13,912 18.7% 718

-1,588

Tax

9,785

4,107

-12.3%

Profit after Tax/(Loss)

20,516 24,874 21.2% 9,486

12,000

26.5%

Provision for VRS

-

8,832

-

Net Profit

20,516 16,043 -21.8% 9,486

3,168

-66.6%

Net profit margin (%)

9.2%

9.6%

15.6%

16.1%

No. of Shares (eoy)

526

526

526

526

Diluted Earnings per share* 39.0

30.5

72.1

24.1

P/E (at current price)

7.5

9,714 8,832

*(annualized)

68

-0.7%

4,684

-

9.5

VRS in public sector banks

SBI's topline grew by an impressive 23% in the fourth quarter of the year. However margins were depressed and operating expenses increased sharply. A 480 basis points drop in operating margins in 4QFY01 could be attributed to the inability of the bank to sustain yield on advances after a cut in deposit rates. ? The cost to income ratio of the bank was also higher at 63% in 4QFY01 (56% in 4QFY00). But if we were to exclude an amount of Rs 4.4 bn written off towards the one-time issue expenses of India Millennium Deposits (to be redeemed at the end of five years, in 2005-06), the ratio declined to 57% in FY01 from 60% in FY00. During the year SBI implemented a VRS plan to cut its operating costs and improve efficiency levels. The total cost of the scheme to the bank was Rs 23 bn. In FY01 the bank had made a provision of Rs 8.8 bn and planed to write off the balance expenditure equally over a period of four years. SBI moved towards the right direction by implementing the VRS, foraying into retail, technology upgradation plan and entering into the insurance business. In future it was be however difficult for the bank to operate at high margins considering the increasing competition and improving quality of services provided by other banks. Also, the bank will have to provide a higher amount as provisions for non performing assets,

69

VRS in public sector banks

if

the

economic

and

industrial

activity

witnesses

further

downtrend. According to industry watchers, by 2010, the entire SBI staff recruited between mid 1960 and 1980 would retire. As a result, SBI would not have sufficient manpower to manage over 9000 of its branches. TABLE CHANGE IN SBI’s STAFF STRENGTH 31-03-01 Officers 52,558 Clerical 103,993 Subordinate 53,729 Total 210,280

31-03-00 59,474 115,424 58,535 233,433

% change -11.63% -9.90% -8.21% -9.92%

In the post-VRS scenario, SBI planned to merge 440 loss-making branches

and

announced

redeploy

additional

administrative

manpower (resulting from the merger of loss-making branches) to frontline banking jobs. SBI also planned to reduce its regional offices from 10 to 1 or 2 in each circle. In August 2001, it was reported that a single officer had to take charge of 3 or 4 branches as

the

daily

Departments

like

concurrent

audit

internal

audit,

got

affected.

concurrent

audit,

monitoring, inspection of borrowers had hardly any staff, according to reports. It was reported that employees working in branches that had a high workload went on work-to-rule agitation,

70

VRS in public sector banks

blaming the VRS for their problems. Analysts felt that SBI would have to take serious steps to reorient its HRD policy to restore employee confidence and retain its talented personnel. SBI had many strong organizational strengths and an excellent training system, but due to weak HR policies, it had lost its experts to its competitors. The employees of almost all the new generation private sector banks were former employees of SBI. The bank’s well-defined promotion policy was systematically flouted by the framers themselves and, as a result, employees with good track records were frequently sidelined. Many analysts felt that SBI was not able to realize the critical importance of recognizing inherent merit and rewarding

the

performers.

The above factors were cited as the major reasons for the success of VRS in the officer cadres, who were reported to be demoralized and de-motivated. The arbitrariness and insensitivity at the corporate level had dealt a severe blow to the employees of the organization. What remained to be seen was whether SBI would be able to reorganize its HRD policy and retain its talented personnel.

71

VRS in public sector banks

An article dated 27th may 2004 states the following.. “The State Bank of India (SBI) is likely to initiate a second round of voluntary retirement scheme (VRS) in the next few months. This time the bank will be targeting employees over the age group of 55 years. It is understood that the proposal will be put up before the board for approval. The first round of VRS which was held about four years back was also targeted employees of the same segment. Speaking to FE, a senior SBI official said a final decision on the issue will be taken after the core banking exercise which involves integrating the branches. As per a rough estimate, there were over 2 lakh employees of which about 60,000 were officers. SBI officials said that 10 per cent of the staff was of 55 years and above. “Recruitment activity was at its highest during 1960s-end and early 70s. Therefore, there was a large number of employees who had crossed 55 years of age,” a source added. SBI is likely to go ahead with the VRS plan independently. Meanwhile, the board is also likely to study the merger proposal of the bank with its seven associate banks. The associate banks of SBI include the State Bank of Patiala, Mysore, Hyderabad, Travancore and Saurashtra among others. “We will seriously look

72

VRS in public sector banks

into the proposal and chalk a feasible plan to facilitate the merger. The merger is the only solution as they cannot co-exist as competitors in the market, particularly in view of globalisation and foreign competition,” a senior finance ministry official said

UCO BANK

T

he board of directors of UCO Bank decided that an officer may seek voluntary retirement from the service of the bank if he had completed 20 years of service in the bank,

or attained the age of 50 years, or if he become physically or mentally incapacitated in such a manner that he is not able to discharge his duties in the bank. The provision to regulation 19 of the United Commercial Bank (Officers) Service Regulations, 1979, reads ``provided also that nothing in this regulation shall be deemed to preclude an officer employee from retiring earlier pursuant to the option exercised by him in accordance with the rules of the Bank''.

73

VRS in public sector banks

An officer can seek voluntary retirement from the bank instead of resigning basically for the following two reasons: If he resigns, all leave to his credit lapses. However, in case of voluntary retirement, he is deemed eligible, in the United Commercial Bank (Officers) Service Regulation, 1979, to be paid a sum equivalent to the emoluments of any period of privilege leave that he had accumulated. If he retires voluntarily, he is, as provided in Regulation 43 of the UCO

Bank

(Officers)

Service

Regulations,

eligible

to

claim

travelling allowance, baggage and other expenses for himself and his family as on transfer from the last station at which he is posted to the place where he proposes to settle down on retirement. This facility is not available in case of resignation of an employee of the UCO Bank. The procedure and conditions for voluntary retirement from the bank's service as approved by the board of directors: The application and relevant documents for voluntary retirement from the service of the bank shall be, in case of officers working in divisions, routed through the respective divisional offices. In case of officers posted at the head office, such applications for voluntary retirement shall be routed through the assistant general manager of the concerned department. The VRS can also be availed under extraordinary circumstances, which are within the satisfaction of the bank, compelling an officer

74

VRS in public sector banks

to seek voluntary retirement from the bank's services. However, in such a case, the officer must have completed at least 15 years of service in the bank. An application seeking voluntary retirement shall be made by an officer in writing to the competent authority not less than three months prior to the date from which he seeks retirement. The application

shall

be

supported

by

the

relevant

documents

wherever required. In appropriate cases, the competent authority may, if he is fully satisfied, reduce or waive altogether the period of three months required for submission of application. It shall be supported by the relevant documents. It shall be open to the competent authority to withhold permission to an officer under suspension who seeks the voluntary retirement scheme. The officer seeking voluntary retirement from the service of the bank shall give an undertaking not to take up any employment for a minimum period of two years from the date of such retirement without prior consent of the bank. Claims with regard to gratuity and provident fund of an officer permitted to retire voluntarily shall be settled as per the rules relating to it. Central Bank of India

75

VRS in public sector banks

It launched its voluntary retirement scheme (VRS) for a period of 15 days commencing on February 22 to March 8, 2001. The VRS payable to the extent of 50 per cent in cash and the balance 50 per cent in the form of bond.

Bank of Maharashtra

It accepted applications of 2,000 VRS optees 800 officers and 1,200 class III and IV employees. About 2,700 employees of a total of about 16,000 had opted for the scheme. VRS costed it over Rs 200 crore and reduced the annual wage bill by about Rs 56 crore. Andhra Bank

It paid around Rs 160 crore in cash towards the voluntary retirement

scheme

(VRS)

of

its

76

employees,

as

against

a

VRS in public sector banks

combination of cash and debentures issued by some public sector banks. It received as many as 1,750 applications from its staff for the VRS.

Bank of India (BoI)

They embarked on a major organisational recast exercise. After the launch of the voluntary retirement scheme (VRS) which was opted by 7,780 employees , the bank was set to abolish one tier (zonal offices) from its four-tier organisational structure. The bank now has three tiers -- branch offices, regional offices and head office. Canara Bank

77

VRS in public sector banks

They received an overwhelming response of around 8,500 applications to its voluntary retirement scheme that ended on January 31 2000.

SECOND ROUND OF VRS ‘’IN a bid to further rationalise staff strength, the Government is

considering a second round voluntary retirement schemes (VRS) for public sector banks. Some banks have asked for a second round of VRS. It is under examination,'' said Ms Vineeta Rai, Secretary,

Banking

and

Insurance,

while

addressing

an

international seminar on banking, organised by Indian Institute of Bankers here. The first round of VRS helped banks reduce manpower by 12-15 per cent. `We have not reached the optimum,'' she said. The public sector banks were able to bring down staff strength by over 1,00,000.

78

VRS in public sector banks

Many banks had said large manpower was putting `strain' on the expenditure and was affecting their profitability, Ms Rai said. ‘`Banks have been asked to undertake manpower planning and each bank has to assess its own requirements,'' Ms Rai said declining to give any time frame for yet another round of VRS. She also admitted that after first VRS, the vacancies were filled up by promoting the existing staff with relaxation in the norms, which had negated the purpose of VRS''. Ms Rai said the need of the hour for the banking industry was to address the issues of right size, right attitude and right skills. BUT The second round of voluntary retirement scheme for public sector bank employees is expected to be delayed for a while with the government planning to link it to the wage settlement negotiations.This is in contrast to the government's earlier stand of letting banks decide on the introduction of the scheme targeted at segments. Additionally, the employees unions have proposed that the banks should also give the employees a second chance to opt for a pension scheme.A bank chief said the Indian Banks Association had sent a draft pension scheme to the finance ministry. Banks are, however, divided on the issue because some of the bankers are of the opinion that the pension bill will outstrip their wage bills over the next 5-6 years.On the other hand, some

79

VRS in public sector banks

bankers were in favour of the proposal because in the VRS that was introduced by all public sector banks in 2001, barring the Corporation Bank, a majority of the optees were accounted for employees who had decided to go for a pension when the offer was made to them in the mid-eighties. Officials said a decision would be taken over the next few days. They, however, said the second round of VRS could only be offered around next year because the wage negotiations had just started and the process was expected to last for a few more months. The Bank of India and the Central Bank of India have already indicated that they will launch a second VRS for employees.

T

he banks implemented VRS with a view to enjoy all its advantages but somewhere things didn’t went as per planned and because of this many problems were faced

by the bank management, customers and the existing employees.

80

VRS in public sector banks

Customer inconvenience was the least of the problems that

banks

suffered.

There

were

disgruntled

employees

throughout the industry. Of course, this state of affairs wass inevitable; even the best-planned VRS’s has an impact on employee morale. But it is also true that the exercise had left several bank managements dissatisfied with the results in business terms too. To be fair, the exercise cannot be written off as a rampant failure. To start with, it’s the first of its kind on this scale. It was also a major move in an industry in which employment was almost considered a sinecure. But the problems it has thrown up hold important clues to what can go wrong when corporations implement a golden handshake.

The State Bank of India, along with a number of other nationalized banks, implemented a voluntary retirement scheme for its employees. A large number of employees actually took advantage of this scheme and sought premature retirement. In consequence, the overall employment of the State Bank of India shrunk. The consequences, unfortunately, are only too evident to those who use the bank. There is now significant understaffing, and

81

VRS in public sector banks

consequent overwork of the remaining employees, with obvious effects on the service. Transactions – even simple matters such as withdrawing money from an account - which earlier required a few minutes, can now take up to an hour. There are usually crowds waiting at each counter, with more waiting time and more mistakes. The fault is not that of greater inefficiency of the remaining workers, but that there are simply not enough people left to do all the required jobs easily and efficiently. What is worse is that the remaining workers are now not just overworked but harried and anxious. The same people who earlier would perform their functions pleasantly and smilingly, are now tensed, rushed and even surly, as they struggle to meet the demands of increasingly irritated customers. Recently, two major multinational banks merged, in an example of growing concentration of the world banking industry. Obviously, that meant that the banks in India also had to merge. This entailed the closing of some branches and the drastic pruning down of staff in others, again through a Voluntary Retirement Scheme which has focused on getting rid of active union members. The consequence, even in this newly merged multinational bank, was a significant deterioration in service. Not only have the number of employees dwindled, but experienced and skilled

82

VRS in public sector banks

workers had been replaced with raw recruits who had yet to learn their work and were prone to many more errors. Many of the bank’s customers found it extraordinary that a major bank, which had always ensured great care in the details of its transactions, was willing to live with such a situation – all in the name of reducing staff in order to improve overall efficiency ! But for a whole range of services, both public and private, the consumers of such services also lost from the process of reducing the number of workers. There were real losses in terms of delays, reduced capacity of the remaining workers to cope with the greater load, resulting mistakes, and a more oppressive atmosphere in the workplace. In fact, the only real benefit from such downsizing was usually be found in the balance sheets of the companies, as they could show lower labour costs and therefore possibly higher profits. This was what creates the competitive pressure across an industry for other companies to follow suit, and to try and reduce the number of their workers. It is time to call the bluff of those who tried and make us believe that downsizing increases efficiency. Instead, it is really a way of shortchanging both workers and consumers, and increasing profits at the expense of everyone else. The irony, of course, is that when all employers try this approach, it leads to lower economic activity

83

VRS in public sector banks

in general, and as a result, for macroeconomic reasons, profits do not rise either ! According

to

many,

the

timing

of

the

cut-off

date

for

implementation of the VRS gave no room for the management in most of the banks as they were too busy with the annual closing of accounts as at the close of March 31. Most of the top management functionaries in banks were engaged in statutory audit and finalisation of balance sheet within the timeframe prescribed, with the approval of their Boards and the like. The public sector banks in India today are in deep trouble as their bad debts (NPAs) are assuming gigantic proportions with no signs of any serious attempt to recover them. Add to this the unprecedented removal of workforce through the back doors, by resort to VRS, CRS and such other unfair schemes, and a gloomy picture emerges. Explains a banking analyst: “Public sector banks have numerous branches and the relocation of staff from one area to another was not as easy as it seemed because the notice given to employees was too short.” Says a former employee of the State Bank of Maharashtra, “There’s no doubt that the VRS was mismanaged. It left all branches short on staff and managers and the remaining staff frustrated.’’

84

VRS in public sector banks

Part of the problem had to do with the fact that in several cases,

many

more

people

opted

for

VRS

than

the

managements had bargained for. In most banks, the management had not planned the replacement of the duties

of

the

exiting

staff.

For instance, in Vysya Bank, according to the union, the percentage of employees who opted for VRS was twice the expected 10 per cent. According to HR officials at Dena Bank, in May 2001, Dena Bank lost around 3,842 employees due to VRS (or roughly

25

per

cent

of

its

total

manpower).

Most banks followed a time-consuming policy of filling in some of the vacancies by mobilising some staff from branches with excess staff. Says an ex-employee of the Union Bank of India, “The banks in semi-urban and rural areas were hit badly owing to lack of computerisation

and

deployment

issues.”

While the banks managed to achieve two major VRS objectives — removing

surplus

(including

non-performers)

and

reducing

employee costs — a second objective was still to be met. VRS was supposed to level the age profile. However, the results were not different from before with 16 per cent below 35 years of age, a sizeable 45 per cent between 35 and 44 years and 39 per cent between 45 and 60 years. Roughly 75 per cent of the officers who

85

VRS in public sector banks

opted

for

VRS

were

in

the

40

to

55

age

bracket.

Further, SBI chose not to abide by government guidelines and offered VRS only to employees above the age of 55. According to government guidelines, any employee who was above 40 and had completed 15 years of service was eligible for VRS. But SBI marked its own cut-off age: it offered VRS to only those employees who were over 55. This created a furore among employees below 55

years

who

also

wanted

to

opt

for

VRS.

Besides, the VRS could have balanced the skill profile vis-à-vis the employee mix (officer:clerical:subordinate), which was earlier 27.6 per cent:50.22 per cent:22.2 per cent in public sector banks. PostVRS, according to the IBA bulletin, the ratio changed to 25.4: 51.0: 23.6, which means that along with clerical staff, the proportion of officers has gone down by 2.2 per cent. The government has now disallowed new staff recruitment, forcing banks to retrain the remaining staff to handle new duties at the shortest possible notice. Some banks resorted to promoting clerks to officer cadre. Andhra Bank, for example, promoted 1,200 clerks to officers with a 20-plus per cent pay hike. The impact of manpower shortage would have been less if the banks’ functions had been automated or computerised. However, reducing employee strength before technology arrived only led to

86

VRS in public sector banks

chaos. The IBA says that in the fiscal 1999-2000, the Central Business Commission had summoned all banks to be 70 per cent computerised. Accordingly, most public sector banks started to work on the target around the time VRS was being implemented. But an SBI HR executive says that the decision was taken too swiftly to enable proper communication to employees. In complete contrast, Corporation Bank refused to exercise VRS at that point and was actually hiring 200-odd new employees for specialised services like technology, marketing and so on. However, the bank then considered the VRS option for about 160 officers above 50 years

of

age.

An additional — and major — problem was dealing with those who were eligible for VRS and whose applications were rejected. In SBI, for instance, only 21,329 employees’ applications for VRS got approved out of the total of 35,380 applications, This

lot

formed

leaving an

about

association

—

11,000 SBIVRS

Optee

dejected. Officers’

Association — to articulate their case and request the government to reconsider applications. The association also maintained that the SBI management “abysmally lacked the human touch in its manpower planning and this resulted in indelible functioning among its officers.” Eleven cases have been filed by these employees against the bank. Says the HR executives at SBI, “It will

87

VRS in public sector banks

take some time to soothe the heartburn but through constant communication the employees that were refused VRS, are being convinced that they were needed and hence were not granted VRS.” There were other problems, Says an officer with Punjab & Sind Bank: “The VRS was conducted in a very arbitrary manner. For instance, VRS was on the verge of becoming Compulsory Retirement Service (CRS). A particular employee in a Mumbai branch, for instance, wanted to withdraw her application but was refused by the management and was forced to leave.” Also, ironically, the financial package didn’t appeal to optees who opted for the lumpsum payment mode. Though the VRS amount was as high as Rs 8 lakh to Rs10 lakh per employee, most employees were willing to prefer a monthly pension scheme. Says Khanna of BanknetIndia: “Usually in public sector banks, the management has an interface with the employees, offering them a counselling-cum-discussion session. But in this case, since a huge number of employees were in the process of exit, this procedure was

skipped.”

Echoes Ganesh Shermon, senior partner, Strategy Organisation and People, Andersen Business Consulting (soon to be KPMG Consulting), “Banks clinically reduced the headcount. Counselling

88

VRS in public sector banks

and out-placement were the issues that were conveniently forgotten by the banks pre- and post- VRS. And worse still, a badlyplanned

VRS

depletes

the

shareholder

value.”

According to Shermon, there were fundamental fallacies in the way banks carried out the VRS. A good VRS, according to him, should be demographically aligned, based on age and competency profile of the employees, should have a clear-cut manpower plan and should be driven by keeping in mind future strategies of the business. “These were missing in the VRS implementation among public

sector

banks,”

says

Shermon.

Says HRD consultant J B Kabra of Mind Movers Management Consultants, “To nullify the psychological impact on employees’ lives, banks could have provided them with alternative means of employment. The optees could have been employed alternatively in the co-operative sector banks, who constantly need staff who can work in shifts.”

89

VRS in public sector banks

AND I AM ALSO OPEN TO GIVE SUGGESTIONS AS LONG AS I FEEL TO SUGGEST!!!!!!!!!!!!

I

f the VRS had landed the banks in a situation where the remaining staff was found inadequate to carry on with the various functions of these banks, it was necessary to

implement the other ingredients of the VRS package. The public sector banks in India have had the unenviable task of completing a round of voluntary retirement of its employees. Most of the bank customers may not be aware of the impact of the VRS (voluntary retirement scheme) on the banks' ability to continue the tempo of customer service. The customers were often found complaining about the service provided to them, but has any of us, being the

90

VRS in public sector banks

customer ever thought the reason behind it. We as customers would newer have experienced too many employees in a bank, but incase of lack of service, have we ever thought about the reason behind it or has the bank management ever thought the exact reason, whether the service provided was better then or now. The only problem was staff management and increased cost. Now should these be solved at the cost of poor customer service? The correct answer to this is the mechanization and the computerization that took place in the banking industry two decades ago, and also the wayside ATMs (automatic teller machines) we see today may loudly announces their ability to provide ample service to the community. But, the fact is otherwise. May be, the service to customers is not hindered so far. When the VRS was in the process of implementation, all staff unions and even some banks opposed it on various grounds. The unions opposed it as they never agreed with the view that public sector banks have had excess flab. This was the view the union leaders held when restrictions on recruitment was enforced by the Government. Such being the case, much reliance may not be placed on this. But, what made some bank managements to come out with statements such as "we do not have excess staff to shed", "we want to have a different scheme in our bank" and the like? Was there a great deal of coercion from various quarters

91

VRS in public sector banks

leading to the implementation of the VRS uniformly in all public

sector banks. If the banks ever ask me the alternatives or solutions to VRS, I would tell them… •Weed out uneconomic branches, either by closure where alternative banking services are available to the public or merge them with nearby branches. It is also worth considering the feasibility of taking over such branches by other group banks like fully government owned banks, State Bank group banks and the like. •Expedite the promotion process in all banks from clerical cadre to officers' cadre which was one of the means suggested to meet the shortfall in the officer staff when the VRS was mooted •Pursue vigorously the computerisation process in all banks, Initiate motivational policies and lay down career paths to staff •Review training plans at all levels and workout short term strategies •Implement

the

alternative

recruitment

machinery

to

the

abolished Banking Service Recruitment Boards (BSRBs) in individual banks

92

VRS in public sector banks

•Streamline and rationalise the systems and procedures in the banks to meet the changing needs and expedite the process of privatisation already under way.

The list may be endless. What is required is the will, and prompt action. The focus is on customer service without

adversely affecting the back office function. The health of the banking system should be improved without any letup in the standard of efficiency expected of a vital link in the liberalisation process which is to be furthered in the road map for achieving global standards. Leapfrogging adequately

from

one

strengthening

policy the

to

another

linkages

can

without lead

to

catastrophic results. Thus

if

VRS

was

employed

but

proved

to

be

a

failure,

implementation of another policy correcting its consequences is not viable. Instead the VRS should be revised and all the loopholes should be looked into at a national level, then only a common solution to the problems of many such banks can be solved.

93

VRS in public sector banks

In an ever- growing sector like banking in India, which is still facing the problem of non-performing assets, hasty implementation of substantive policies will make matters worse. The banking sector has unfortunately been the target of such instances for the last 32

years!

A

fter a thorough research it can be concluded that If the VRS has landed the banks in a situation where the remaining staff is found inadequate to carry on with the various functions of these banks both internal and to the clientele - it is necessary to implement the other ingredients of the VRS package such as redeployment, accelerated

mechanisation

and

computerisation,

selected

recruitment of specialised staff and closure of or merger of uneconomic branches. From the published results of some of the banks, it has been seen that the VRS outgo has substantially

94

VRS in public sector banks

reduced the declared profits and it remains to be seen whether the bottom-line of all the banks has withstood the weight of this expenditure. Well, what has been done cannot be undone. At least now it is imperative to take stock of the actual state of affairs and initiate corrective measures before it is too late. Some of the urgent needs are:

Identification

of

deficit

manpower

in

each

bank.

Redeployment on the basis of all India norms, instead of leaving the matter to the local or bank level management. This will be a rational approach as the VRS norms were also on national level.

I

n order to find out the present thinking of the bank employees, I conducted a survey by distributing questionnaire to bank employees from NEW INDIA CO-OPERATIVE BANK, DENA BANK & BANK OF INDIA. The survey size is 30 i.e. 10 employees each bank. The questionnaire for the employees is as underROYAL COLLEGE OF ARTS, SCIENCE AND COMMERCE A QUESTIONNAIRE FOR BANK EMLOYEES RELATING TO VOLUNTARY RETIREMENT SCHEME BANK: AGE: SEX: QUALIFICATION: DESIGNATION: NO. OF YEARS SERVICE PROVIDED:

95

VRS in public sector banks

1.

YOUR MONTHLY SALARY RANGES BETWEEN.. BELOW 10,000 10,000 TO 20,000 ABOVE 20,000

2.

DEPENDANTS IN YOUR FAMILY….. NONE 2 TO 3 3 TO 5 MORE THAN FIVE

3.

A BETTER OPTION FOR YOU… VRS CONTINUING THE JOB

4. YOUR EXPECTED AMOUNT FOR VRS _______________________ 5. YOU WOULD PROBABLY UTILISE THE VRS AMOUNT FOR… INVESTMENTS OLD AGE SAVINGS FOR CHILDREN SETTING UP A BUSINESS

FINDINGS For a clear understanding of the collected and its systematic representation the use of charts and diagrams will be done in order to analyse the data. Moving on with the question whether the bank employees will accept or reject it, the following results were found…..

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VRS in public sector banks

90 80 70 60 50

accept

40 30 20 10 0

reject

The blue bar represents the percentage of employees who would accept the VRS offer and the red bar represents those who would reject it. Now, the blue bar mostly comprised of the people between the age group of 45 – 50 years. The amount that they expected to receive ranged between Rs 2000000 to Rs 25000000. The employees who would accept the offer were asked as to where they would invest their amount. Their replies are represented in the form of a bar diagram.

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VRS in public sector banks

40 35 30

investments

25

old age savings

20

for children

15

setting up a business

10 5 0

It can be clearly seen that the maximum employees would keep their saving for their old age thus securing their future, and the least of them would apply it in setting up a new business. While some would invest it in equal proportions between old age savings, setting up a new business and for their children. Thus, it can be concluded saying that if given an option, not many would opt for VRS and that the optees would be people nearing their retiring age and would utilize their amount for their old age saving

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VRS in public sector banks

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www.hinduonnet.com

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www.thehindubusinessline.com

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www.hindu.com

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www.merinews.com

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www.icmrindia.com

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www.planningcommission.nic.in

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www.banknetindia.com

DATA COLLECTION From the employees of – •DENA BANK, MIRAROAD BRANCH •BANK OF INDIA, MIRAROAD BRANCH •NEW INDIA CO-OPERATIVE BANK

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VRS in public sector banks

FACTS ARE ENDLESS!!!!!!!!!!! This is what I believe. And thus, I would like to make a mention that this is not the end on the facts of VRS. There is much more to it. I have tried my level best to understand various factors and present it in the best possible manner.

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VRS in public sector banks

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