VRS: Making PSBs leaner and meaner

N. S. Vageesh

At long last, public sector banks have begun offering voluntary retirement schemes (VRS) based on a model drawn up by the Indian Banks Association.

A year ago, such a scheme would have been unthinkable. A factor that prevented policy-makers from offering the VRS earlier was the absence of sufficient alternative lateral employment opportunities. The private and foreign banks and the now weakened NBFC sector can only absorb 10 per cent of the million-strong PSB workforce. The argument so far put forward was that a large unemployed pool of skilled labour would have created tensions in society with negative consequences. Though this issue has still not been addressed, other events have forced the VRS issue.

Opinion is divided on whether the PSBs are over-staffed. Ratios such as business-to-employee or profits-to-employee are flayed by senior banking officials. They point out that public sector banks serve a heterogeneous mass of customers whereas private and foreign banks can choose theirs, and therefore, target the cream to generate better returns. They also point out that recruitments have virtually stopped in the last six years, whereas the volume of business has grown manifold. There is some merit in the argument. However, VRS in PSBs has become imperative, if only to check burgeoning wage costs.

Wage costs in PSBs account for nearly 73 per cent of the operating expenses. This is clearly unaffordable considering that spreads for the banking sector are thinning. Competitive pressures from other segments of the banking industry have forced the PSBs to rationalise their workforce and restructure operations.

A number of banks are close to finalising schemes that would enable them to trim 5-10 per cent of their manpower. The scheme has been made more attractive by offering a severance package of 60 days pay for every year of completed service, or for the remaining months of service, whichever is lower.

If the best talent opts for it, would the VRS leave these banks weaker? Not necessarily, some attrition is inevitable. Observers point out that with the entry of new private banks, a VRS without benefits was offered in 1995-1996. Many senior executives of PSBs were poached to man the operations of these private banks. But public banks carried on nevertheless. Besides, the scheme also gives the management the discretion to refuse the VRS option to employees considered critical for their functioning.

Banks such as SBI and Bank of Baroda expect to shed around 23,000 and 3,000 employees respectively through their schemes. The exact cost of the VRS and its impact on bank profits this year is still not clear. Nor are there indications as to how the scheme will be funded. The possibility of raising a special soft loan from the World Bank is being considered. However, no concrete proposal has emerged. Half the payments to those opting for the VRS would be in cash and the remainder in the form of bonds.

It is still too early to determine the success of the scheme, though initial news reports indicate that the scheme has met with good response in Punjab National Bank. The strike to protest against the VRS, and enforced by a couple of unions across all public sector banks on November 15, is a futile last-ditch effort. Ultimately, the individual has to decide. After all, the scheme is voluntary.