Voluntary Retirement Scheme Implemented by Public Sector Banks

It is a known fact that in India getting rid of surplus or no-longer-needed employees is a

task easily said than done. It is possible to terminate a CMD or any other director of a
bank, but not an staff-member covered under a Trade Union or the Industrial Disputes
Act. In this prevailing environment the fact that PSBs have been able to dispense with a
significant percentage of their redundant workforce within a short period of seven months
during 2000-01 is a marvelous feet, with no parallel in recent history of Public Sector
Enterprises.

Objective of VRS by PSBs

The main objective of VRS, other than the oft quoted downsizing and bringing down the
cost of operations (intermediation cost) in the public sector banks, is the acceptance of
the ground reality that the banking of New Millennium is more technology based than
people based. By the end of the first decade of the New Millennium, the public sector
Banks will not be needing their entire clerical workforce along with the first line
supervisory officers, as their functions will be (and has been) taken over by technology.
Besides, as the systems and work technology would also change, there will be no need of
the Subordinate staff. Their functions can either be outsourced or taken care of by
changes in the systems, procedures, and working styles.

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. 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.

The Public sector banks are clearly over-weighed. The wage bill constitutes the second
largest expense for the banks apart from the interest paid on borrowings. These banks had
recruited many employees at the clerical level which involves routine jobs with no
specialized skills. With the technology coming in and replacing these employees, the staff
became redundant. Technology not only reduced the cost of operations but also spared
the management from the problems and strikes posed by the employees. The statistics on
human redundancy and productivity are shocking.

According to the Verma committee report, staff cost as the percentage of operating
incomes is as high as 108 percent in Indian Bank, 76 percent in UCO Bank and 80
percent in United Bank as compared with the ratio of 47 percent in the PSU banks. The
FICCI study used the benchmark of Rs. 125 lakhs BPE (Business per Employer) and
points out that 22 percent of the bank employees in 16 public sector banks are redundant.
SBI needs to reduce the staff strength by 57,978 to attain a Rs.125 lakhs BPE. Bank of
Baroda, Corporation Bank, Dena Bank and Oriental Bank of Commerce have achieved
the Rs.125 lakh BPE registering higher profit per employee. The establishment cost is
also very high at 20.13 percent in nationalized banks compared with the 7.66 percent of
the foreign bank and 3.04 percent of private banks. Though there was some improvement
in the past 4 to 5 years due to competition from the private and foreign banks, the ratios
are not comparable to the international standards. The wage bills as a percentage of total
assets declined during the period from 2.05 in 95-96 to 1.66 in 1999 - 2000. Banking
being a service sector industry, productivity of the staff has a significant bearing on the
banks overall performance. Profitability based indicator- the profit per employee of
public sector banks witnessed a significant rise between the period 1996-97 and 1999-
2000. It rose from about Rs.35000 per employee to about Rs.65000. Foreign banks are a
way ahead in this respect with a profit per employee at around Rs. 700,000 per employee.

Cost of intermediation ratio is the crucial measure of efficiency. VRS comes at a time
when the banks are showing marked improvement in efficiency. The recent currency and
finance report published by the RBI was all praise for the improvement in efficiency in
banking sector. Despite the competition with numerous players in the field, the banks
were able to maintain the profitability levels by reducing the cost. Going into the details,
the cost of intermediation (operational expenses to the total working fund) has come
down from 2.94 percent in 1995-96 to around 2.49 percent in 1999-2000 for the
scheduled commercial banks. The new private sector banks also cut the cost of
intermediation from 1.89 percent to 1.42 percent. An effective reduction of about 25
percent. The only exceptions were the foreign banks, which could not reduce their
intermediation cost. However, these ratios are nowhere near the international levels.
These ratios have been falling internationally due to technology up gradation and
improvements in system and product innovation.
Freedom for the Banks to Directly Recruit officers & Workers

The public sector banks are also now given autonomy to recruit employees. The finance
minister in the recent budget has abolished the Banking Services Recruitment Board
(BSRB). This has given the banks freedom and flexibility to have their own recruitment
policy. This will reduce the cost and the time of recruitment and at the same time
opportunity to recruit quality staff from some of the premium institutions. This will
enable people with skill and the ability, who could take voluminous work, to join banks.
BSRB was set up about 20 years ago to streamline and have uniform recruitment
procedures across the PSBs. However, this method of recruitment has become redundant.
Most of the private and foreign banks opt for the cream through campus placements.

Human Resource Development in Banking

A recurring theme in the annual BECON Conference has been the need to focus on
developing human resources to cope with the rapidly changing scenario. The core
function of HRD in the banking industry is to facilitate performance improvement,
measured not only in terms of financial indicators of operational efficiency but also in
terms of the quality of financial services provided. Factors such as skills, attitudes and
knowledge of personnel play a critical role in determining the competitiveness of the
financial sector. The quality of human resources indicates the ability of banks to deliver
value to customers. Capital and technology are replicable, but not human capital which
needs to be viewed as a valuable resource for the achievement of competitive advantage.
The primary emphasis needs to be on integrating human resource management (HRM)
strategies with the business strategy. HRM strategies include managing change, creating
commitment, achieving flexibility and improving teamwork. These processes underlie the
complementary processes that represent the overt aspects of HRM, such as recruitment,
placement, performance management, reward management, and employee relations. A
forward looking approach would involve moving towards self-assessment of competency
and developmental needs as a part of a continuous learning cycle.

Voluntary Retirement Scheme is a unique initiative and a bold attempt to accomplish an

extremely complicated and arduous task, that of sending home over a lakh of serving
bank officers and employees, who formed part of these banks all the years, (extending
fifteen or more), without creating least dissatisfaction to the affected employees or
spreading an industrial unrest in the Banking Industry. In short the PSBs are not
compelling any specific employee to leave service, but in the reverse process the
employees willingly come forward attracted by the liberal provisions of the scheme and
opt to retire from service voluntarily without any pressure being exercised on them by the
management. It is retrenchment in effect, but without pain and anguish to those
retrenched.
It was implemented in the first stage by 26 out of the 27 PSBs, with the sole exception of
Corporation Bank. The VRS scheme of SBI or SBT, is not different from the rest of the
PSBs in terms of the basic content of the benefit-package or other terms offered. But in
view of different size and culture of the individual PSBs the variable features are mainly
in the manner of response that the scheme received from their respective employees.
Thus everything of the core elements of VRS as recommended by the Government are
common and applicable in toto to the schemes sponsored by all the PSBs including SBI
and SBT. It has therefore become necessary to study the background of the circumstances
leading to floating of VRS scheme by the Government-owned banks, which constitute of
80% of the banking system in India.

While presenting the factual data about VRS programmes acclaimed universally as
having been successfully implemented by the PSBs, an attempt is made to critically
analyse and assess the scheme from different perspectives relating to the fulfillment of its
conceived objectives, the implementation strategy adopted, the post VRS scenario in the
banks, and a study of the wisdom and merits of accepting VRS by about a lakh of
bankmen in terms of their own future prospects. They have discounted years of future
cash flows assured and inherent in continued service with the bank, for the instant benefit
of a lump-sum bargain. Is it a wise step beneficial to them in the long run or have they
out of greed cut the goose that was laying one golden egg per day in the fond hope of
getting all at once? This is attempted to be answered in this treatise.
Rationale of the Philosophy of VRS
Voluntary Retirement Scheme (VRS) more appropriately stated as Voluntary Early
Retirement Scheme is an innovative concept evolved in India in the post Economic
Reform Environment. The Scheme was initially implemented in the financial year 2000-
2001 by public sector banks. VRS is an attempt to synthesize an operation aimed towards
downsizing the work force of Public Sector Banks, with employees' willing acceptance
and participation. In other words it is retrenchment without tears. A very attractive
package of terminal benefits and compensation favourably motivated employees in large
numbers to voluntarily seek early retirement and leave bank service, thus realising the
objective of the Banks to shed part of the surplus manpower and become leaner. The
initial experience gained in VRS scheme operated by the Banks has enabled the
Government to extend the methodology to a wider scale in the subsequent period and to
accomplish the process of ratonalisation of manpower and shedding excess flap in other
Public Sector Undertakings and in the Civil Services of the Government Departments, all
of which have become overcrowded with heavy surplus workforce, consequent to the
rationalization of systems and procedures in the post Reform period shedding a host of
redundant controls and restrictive provisions, transferring several functions hither to
performed by the Government to private enterprise, and switching over to computerised
operations every where, rendering huge workforce manually carrying on these operations
redundant. The result is a high cost wage component with low productivity, and making
Indian Industry and business less competitive in the global market. It is an anomaly that
the Indian worker is paid comparatively low scales of wages, while the employers are
suffering from a high cost of labour content in their cost structure. It is the number
employed that creates the situation of low wage and high cost. Thus both the worker and
the business/industry stand to benefit by ratinalisation of work force and improving
productivity.

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. 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.

At an industry-level, while 27 per cent (64,327) of the total of 2,38,116 officers have
opted for the scheme, only 11 per cent (49,010) clerical staff, out of 4,33,666, and 7 per
cent of sub-staff (12,945) out of 1,91,335, have sought VRS.

Public Sector Banks incurred an expenditure of approximately Rs.10,000 Crores to

dispense with the services of the one lakh and odd officers and employees. They have
obtained the permission of the Government and followed guidelines as per scheme
formulated by the Government of India, the outlines of which are given in the Annexure.
Why such an elaborate system and why the Public Sector banks are forced to downsize
their work force by such a steep level? Banks are service providing institutions. They
recruit employees initially incurring considerable cost, and subsequently have to train
them for several years continuously. At clerical level an employee needs six months
training, while an officer at a junior level is given training on direct recruitment for three
years. It may need for such an officer another 5 years to be eligible to become a branch
manager and so on for different higher positions, most of which are filled through
internal promotions. All these involve huge expenditure. Banks pertain to the category of
service industry providing a specialised professional service. Its main stock-in-trade is
expert knowledge, an intangible asset. This prime asset of the Banks is not stored in its
show rooms or in godowns, but rests with its officers & employees. A part of the same
may be structured and retained in instruction manuals, guidelines and job charts, but
predominantly it rests with the employees, who are repositories of its knowledge-wealth.
A huge turnover of skilled and trained employees at a point of time from an institution
will disrupt its normal working, in addition to the loss of heavy resources already spent
on their recruitment and elaborate training incurred under the consideration that their
service will be continuously available for the full term or entire span of their career.
Before first analysing this, it is more useful to trace the industrial environment and policy
towards retrenchment of labour in India.
The Industrial Culture & Labour legislation of India
A relevant issue that comes to the fore is about the need or justification to offer a heavy
monetary package to the employees as an inducement to accept VRS. In the normal
course if an employees offers to resign and quit service, he is paid the conventional
terminal benefits that is due to him. But under VRS each employee has been paid an
additional amount around Rs.6 Lacs (the industry average) over and above such terminal
benefits. Is it necessary to pay employees huge compensation for retrenching them from
service, a package that included compensation at four times the normal rate (60 days per
year of completed service as against 15 days prescribed under law)? Why this bounty?
Will this not cripple the already over-burdened revenue resources of the PSBs?

As per service regulation governing officers of Government owned banks, "the bank may
terminate the services of any officer by giving him three months' notice in writing or by
paying him three months' emoluments in lieu thereof". This normally is the course
followed by global corporates in western countries. But in India though embedded in the
contract of service, this happens to be a dormant provision never taken recourse to
because of the legal umbrella or cover to the employees by the Government as part of its
benevolent labour Policy of protecting employment and workers in the country.

India, our country is a welfare State. While public servants in India as a rule are subject
to strict discipline and conduct regulation, Governments (both at the Centre and the
States) and Public Corporations have the responsibility to act as model employers and
look after the welfare of those serving the civil services and public services and several
Organisations and Institutions under the financial control of the Central and State
Governments. Indian government, therefore, follows a policy for protecting the interests
and promoting the welfare of labour. The Constitution of India contains a chapter on
Directive Principles of State Policy . Article No.38 deals with and titled - "State to secure
a social order for the promotion of welfare of the people" and further states that "The
State shall strive to promote the welfare of the people by securing and protecting as
effectively as it may a social order in which justice, social, economic and political, shall
inform all the institutions of the national life." In the spirit of this accepted goal, the
Government of India has accepted a progressive labour welfare policy.

Central Government has a Labour Ministry headed by a Cabinet Minister to look after the
welfare of Labour both in public and private employment. Government of India has
enacted several welfare and ameliorative legislation to protect and ensure the rights of
workers like Industrial Disputes Act 1947, Indian Trade Unions Act 1926, Industrial
Employment (Standing Orders) Act, 1946 etc. All these enactment confer protective
rights to the employees both in public and private undertakings.

As a result of the benevolent policy of the government towards organised labour,

termination of employees for whatever reason is a time consuming process in India. The
Industrial Disputes Act, one of the key pieces of labour legislation, makes it mandatory
for every firm employing more than 100 people to seek government approval before
retrenching or effecting closure. The Act provides strict rules for layoff, retrenchment and
compensation. No employee in any industrial establishment who has worked for more
than one year may be retrenched without being given one month's notice in writing
indicating the reasons for retrenchment. The employee is also entitled to compensation
equivalent to 15 days' pay for each year of service completed. The dismissal of workers
may be contested through a petition to the government and can lead to a time-consuming
process of negotiation. In practice, termination of employees is rare except for cases of
proven theft or embezzlement of company funds and other acts of serious misconduct.
Even here an elaborate quasi-judicial procedure has to be following allowing the
employee to represent his side of the case in his defence.(Government has since amended
this legislation by exempting units employing up to 1000 people, but also increasing the
compensation payable from 15 days to 45 days' pay for each year of completed service)

Bank officers and employees are organised under powerful trade unions. In the normal
prevailing ground situation reducing work force on such a magnitude is impossible.
Banks have therefore opted the choice of Downsizing with dignity and with workers
consent. It is sometimes termed as the "Golden Handshake".

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

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

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

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

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

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

Globally Banks in the period were growing in volume and diminishing in size (of
manpower) due to application higher technology and development of high-tech banking,
while in India Banks were growing in physical size still continuing with manual
operations and the outmoded 'pen & ink' systems, resulting in high-cost, low productivity,
bad customer care and diminishing profits and reduced sustainability. This led to a crisis
in the year 1992 when the first phase of reforms were introduced in the Banking Sector.
The Reserve Bank of India in its web-site has described the symptoms of the crisis in the
following words:
"Till the adoption of prudential norms relating to income recognition, asset classification,
provisioning and capital adequacy, twenty-six out of twenty-seven public sector banks
were reporting profits (UCO Bank was incurring losses from 1989-90). In the first post-
reform year, i.e., 1992-93, the profitability of the PSBs as a group turned negative with as
many as twelve nationalised banks reporting net losses. By March 1996, the outer time
limit prescribed for attaining capital adequacy of 8 per cent, eight public sector banks
were still short of the prescribed level."

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

 healthy banks (those that are currently showing profits and hold no accumulated
losses in their balance sheet)
 banks showing currently profits, but still continuing to have accumulated losses of
prior years carried forward in their balance sheets
 Banks which are still in the red, i.e. showing losses in the past and in the present.

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

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

 Huge unproductive labour rendered surplus on account of rationalisation and

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

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

Methodology of Planning and Designing the Scheme

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

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

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

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

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

The estimated cost has been worked out on the basis of the exgratia payment that would
be doled out to the applicants. This includes all payments under the scheme, excluding
cost of regular terminal benefits for which banks are required to make provisions on an
ongoing basis. PUBLIC sector banks took a hit of about Rs 7,490 crore on account of the
recently concluded voluntary retirement scheme (VRS), according to a consolidated
picture compiled by the Ministry of Finance. The scheme came to a close on March
31,2001.Out of the Rs 7,490 crore, the cost for the 18 nationalised worked out to Rs
5,373 crore, while for SBI and its seven associate banks (SBI group), it would work out
to Rs 2,117 crore. This is as per initial estimate on 31.03.2001, when the scheme closed.
The total outgo inclusive terminal benefits already provided for was estimated at
Rs.10,000 Crores.
The Economics of the Scheme

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

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

The basic economics and viability of the scheme is apparently beneficial for both the
employer and employee. But these are based on specific assumptions for the employer
that the functioning of his banking service at optimum efficiency will not be affected
even after dispensing with 10000 of his workers. It also rests on the wisdom of individual
employees who came out under the scheme to develop further knowledge and expertise
and seek opportunities under greener pastures.
The VRS was prompted by the government's assessment that banks are heavily over-
staffed and that technology upgradation, particularly through the pervasive use of
computers, justified a reduction in manpower. It was postulated that banks, particularly
the "weaker" ones, would need to shed a section of the clerical staff, a large number of
whom deal with routine work.

However interim figures (provided by the unions) reveal that a substantial proportion of
those who have opted for the VRS comprise officers and not clerical staff. In the SBI, for
instance, it is reported that 22,000 of the 33,000 personnel who have opted for the VRS
are officers. The other significant aspect is that the exodus is not confined to the "weak"
banks; thus, the number of those who have opted for the VRS has been rather high in
banks such as the SBI, Bank of India and Bank of Baroda, which a re generally regarded
as better performers. While Corporation Bank has announced that it does not intend to
offer a VRS, Central Bank of India is to launch its VRS later in February

S.R. Sengupta, general secretary of the All India Bank Officers' Confederation (AIBOC),
told Frontline that the banks concerned would now face serious problems because there
had not been "proper application of mind" in the implementation of the VRS. He alleged
that in their eagerness to follow the government's directives, the banks had "not paid
attention to manpower planning". He narrated the case of a bank branch where all the
personnel - from the messenger to the branch manager - opted for the VRS, to make the
point that the VRS is likely to play havoc with normal commercial banking operations.

Shanta Raju, general secretary of the SBI Officers' Association, affiliated to the AIBOC,
said the VRS had "resulted in an alarming situation." He said that 22,000 of the 60,000
officers in the SBI had opted for the VRS. In the beleaguered Indian Bank, more than
2,500 of the 4,000 who had opted for the VRS were officers. The situation in the
Chennai-based Indian Overseas Bank is similar, according to union sources.

There is also apprehension that the exodus of staff may increase the workload of those
who stay on. Junior staff will have to be trained soon so that they can take on the
additional workload. More serious is the fear that banking operations will be seriously
affected and in fact even curtailed because of the paucity of trained staff. Shanta Raju
said that this redeployment of personnel could seriously affect banking operations in the
rural and remote parts of the country. It is estimated that about two- thirds of the 60,000
branches of public sector banks are in rural and remote areas.

Guidelines issued by the Reserve Bank of India limit fresh recruitment by individual
banks to 0.25 per cent of their respective staff strength. This means that the SBI, with
2.35 lakh employees, can recruit at the most 2,000 persons across all categories of
employees during the next year. Shanta Raju reckons that the shortage of skilled
personnel would not only affect the bank's operations but also seriously increase pressure
on the existing staff.
It was initially expected that about Rs. 6,000 crores may be needed to fund the VRS.
Assuming an average outgo of Rs.10 lakhs per employee, the package in the public sector
banks is now expected to cost over Rs. 10,000 crores. The overwhelming response now
means that the banks would need to raise much more money than had been anticipated.
However, Y. Radhakrishnan, Deputy Managing Director in charge of human resource
development at the SBI, told Frontline that the SBI was "fully geared to meet the
outflow". He also said, "there is no fear of destabilization" in the wake of the exit of a
large number of officers under the scheme. Although the SBI's offer closed on January
31, employees have until February 15 to change their mind.

While the expense on the VRS is of course a major worry for the banks, they will also be
affected by the drain on profitability in the short term. In addition, the Capital Adequacy
Ratio (CAR) will come under strain. The stringent CAR norms, a significant prescription
of the Narasimham Committee's recommendation for financial sector reform, is likely to
force the banks to the capital market. In fact, Sengupta alleges that the government is
forcing the banks to do just what it otherwise seeks to through the proposed legislation -
to reduce government equity in the public sector banks to 33 per cent.

The restructuring of the banking industry that is now apace has alarmed those who
visualise a catalytic role for the banks in economic development. There are fears that the
public ownership of banking, which in 1969 ensured that banks became a part of national
economic infrastructure, is now being decisively reversed. Mergers of bank branches,
called "closures" by the unions, are resulting in banking operations being totally
withdrawn in parts of the country.

The unions allege that the VRS is in tune with the government's objective of downsizing
the public sector. They fear that the banks would be forced out of the development role
that they had been performing. Recent reports indicate that public sector units are likely
to replicate the VRS packages of the banks. Moreover, the closure of branches would
shrink their space. Once this is done, there would be very little to distinguish them from
the private and foreign banks, which are mainly confined to the metropolitan and urban
centres. Once downsized, and subjected to the planned dilution of government stake, they
are likely to be ready for sale to private and foreign banks.
Merits of VRS as a strategy towards manpower planning
It was possible to effect a break through to achieve quickly and within a short time and
without any friction a task that otherwise belied an easy solution. Th example of VRS
implementation in the Banks became a model to be implemented by the Government in
various other organisations and departments. In this way it is an achievement.

In the scheme where the option of choice shifts to the employees and not in the hands of
the Banks, there is a certain scope to face some anomalies. The Banks wanted to shed
surplus clerical and subordinate strength. But there was overwhelming response from the
officers in scale II and Scale III. There can be no surplus in this category, whereas
Officers ion Scale I, who perform routine supervisory jobs could be over-staffed. But the
problem is of short-term nature. Officers who left in Scale II, and Scale III were earlier in
Scale I and prior to that most of them were in the clerical cadre. Thus there is no need for
the banks to look to the open market to replace middle-management cadre officers, who
have left. Eligible clerks would be promoted as Scale I officers and eligible Scale I
officers as Scale II cadre. In fact this exercise has already started in many of the Banks
including SBI and SBT. There was in the preceding decade too much stagnation in these
junior cadres and promotion was not taking place. The particular effect of VRS has come
as a blessing to them in disguise.

Second problem faced is that geographical/regional mismatches. There were more

desertions under VRS at specific centres. This difficulty could have been avoided, if VRS
planning was done region-wise and centre-wise and implemented after identifying
surplus manpower at each point. But the scheme would become less attractive and will
lose some of the characteristics of the label "voluntary". It is now possible to redeploy
staff available from one centre to another (i.e. from the surplus to the deficit centres).
This process also can be completed within 6 months to one year, and therefore its
negative impact can only be temporary.

Most of the banks have absorbed the expenditure on account of VRS as per guidelines of
the Government, and disbursed in installments, while SBI could decide to pay the full
amount in cash in a single occasion. The bogey of problems of short-term liquidity crisis
and impairment of Capital Adequacy Ratio were raised, but the fact is that the banking
System in particular the PSBs have performed extremely well in the financial year 2001-
02 (post VRS-period). In fact in this year the PSBs have done even better than the private
banks.
How the Scheme was Implemented in PSBs in General
and SBI and SBT in particular

History of VRS up to the date of implementation by the respective PSBs, which

commenced on 01.09.2000, is common for all these banks. This is because up to this
stage 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. results achieved.

The package differs from bank to bank but has been broadly structured around the
"model" prescribed by the IBA. There is 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 are 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, have offered to settle fully in cash. According to
figures available by early February, of the estimated one lakh and odd employees who
have offered to accept the package, at least 33,000 are from the SBI. However SBI has
accepted VRS applications of only 20784, as indicated above.

On a bank-wise break-up, SBI's estimated cost for VRS is by far the highest at Rs 1,500
crore. And average cost per employee worked out to Rs.6.52 Lacs. It is 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.
Analysis of Results Achieved by State Bank of India
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.

Officer Clerica Subordinat Aggregat

Particulars
s l e e
Total Strength 60536 117184 59784 237504
Those opted VRS 6694 11271 2819 20784
%age VRS to Total Strength 11% 9.62% 4.72% 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 payment under VRS and relieved 915 employees,
which is approximately 7% of the staff-strength as detailed hereunder

Officer Clerica Subordinat Aggregat

Particulars
s l e e
Total Strength 3150 7023 2964 13137
Those opted VRS 534 299 82 915
%age VRS to Total Strength 16.96% 4.28% 2.77% /TD>7%
Analysis of the Merits of the Decision of VRS Optees who Preferred to leave -
A Review of their Post VRS Prospects

This is a draw back in the planning details of the scheme. A lakh and more of skilled and
trained employees have been drawn away from the banking system. No doubt they are
given fair compensation. But these employees are mostly from the middle class families.
They are accustomed to live under a monthly budget based on a recurring income. Could
they now switch to the use of a single seed capital and spread the benefits throughout
their remaining tenure of life, which on account of early retirement would be more than
the period of normal retired life of their counterparts superannuating in the usual course
at their attainment of the age of 60. Were they to spend away or blindly invest the amount
yielding a poor return or quick depreciation their lots will be unenviable. Throughout
their remaining life they will be blaming themselves for having made an improper and
hasty choice of accepting VRS.
This is the first batch of bank employees numbering 1 lakh and odd. Further streams from
the Government and other Public Sector organizations are to follow. How to link these
persons with talent and experience to productive use in the national economy?

What all that need to be done to the employees is proper counsel and guidance for a fresh
career planning. They need to re-train and better equip themselves suited to the future
needs of the banking and financial sectors. A percentage of future recruitment could be
planned from this channel. What all they need is only by way of concession in the
eligibility criteria relating to age limit. This could have been considered. A condition can
also be imposed that if they are re-employed their fresh salary plus pension should not
exceed the ceiling of pay for that cadre. They also need counsel how to best invest the
amount of terminal benefits received so that it remains safe and secure yielding a regular
income over the years.

An Objective Assessment.

VRS is the first step towards the rationalisation process to adopt banks to confirm to the
post reform ethos of banking. Banks have to complete computerisation of operations as
per programmed phases. Better selection, training, placement and promotion policies
need to be evolved. The wage structure in particular in the senior levels be such that it is
comparable to what is prevalent in the well managed private sector companies and able to
attract the best talent to banking fold. Small and unviable units have to merge with better
ones. Individual banks should start economic and banking research cells. Better
transparency and corporate governance need to be accepted by PSBs to secure investor
confidence. In short each PSBs by itself should become dynamic and self-reliant and
compete with other units and with the units in the private sector. Change is a continuous
process. The PSBs have accepted the philosophy of change and self-reliance. The future
holds the answer and prospects are that the country will have the best in banking at par
with global standards in the years to come. Despite obstacles, the miracle of reforms, the
market forces, in particular the competition from private banks and urge to survive will
be the directing forces to usher the change towards the better. There was quantitatively a
sea change in Indian Banking of year 1980 from that, which existed in 1960, i.e. 10 years
after nationalisation. Much more transformation both quantitatively and more so
qualitatively can be seen in the year 2010, i.e. ten years after VRS.
Salient Features of Voluntary Retirement & Sabbatical Scheme:
1. Eligibility

All permanent employees with 15 years of service or 40 year.

However following employees will not be eligible for this scheme.

i. 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.

ii. Employees against whom Disciplinary Proceeding are contemplated/pending or

are under suspension.

iii. Employees appointed on contract basis.

iv. Any other category of employees as may be specified by the Board.

2. Amount of Exgratia

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.

3. Other Benefits

i. Gratuity as per Gratuity Act/Service Gratuity, as the case maybe.

ii. Pensions (including commuted value of pension)/bank's contribution towards PF,

as the case may be.

iii. Leave encashment as per rules.

4. Other features

a. 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.
 b. Care will have to be taken to ensure that highly skilled and qualified workers and
staff are not given the option.

c. There will be no recruitment against vacancies arising due to VRS.

d. Before introducing VRS banks must complete their manpower planning and
identify the number of officers/employees who can be considered under the
scheme.

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

5. Funding of the Scheme

a. 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 in remaining 50% after a stipulated period.

b. 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.

6. Periodicity

The scheme may be kept open up to 31.3.2001

7. Sabbatical

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 year. 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.