"The introduction of VRS is part of the organizational preparedness for these public sector banks to be ready for such

changes and take on the challenges of the new banking. All these Banks will have no need of 75 percent (today 25 percent of the work force is subordinate staff, 50 percent is clerical staff and 25 percent is the officers) of the existing workforce by 2010. Only in very few hinterland rural pockets there may be a possibility of a need of the present structure of workforce. The objective of VRS is to prepare for this reality of the first decade of the New Millennium, where banking will be more tech based and less people based."(Source - article from "Analyst" Journal of Institute of Chartered Financial Analysts, Hyderabad titled - VRS in Banks - http://www.icfaipress.org/aprilana/vrs.htm ) The voluntary Retirement Plan (VRS) offered by public sector banks to the employees is the trend setter that was to be followed by other public sector undertakings subsequently. The bank defined the terms and extended the offer to the employees. It may be accepted by those employees to whom it is acceptable. Still more than one Lakh employees of PSBs accepted the same and retired from service. There are four articles (plus Annexure) describing voluntary retirement scheme implemented by public sector banks in the year 2000. The first article is by way of introduction and the next three articles with Annexure are contributed by Ms.K.R.Chitra, a PG Student studying M.Phil in Kerala University. Ms. Chitra analyses the issues relating to VRS and presents a critical review of the scheme from the point of view of the banks, the trade unions and the employees. 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. VRS - The Beginning of the Process of Rationalisation & Streamlining of the Workforce VRS is but the beginning of a crucial process. Positive results can accrue only through pragmatic follow-up steps implemented by individual banks in the Post-VRS period. The management should instill confidence in the employees who did not opt for the VRS. With the chain of command and the organization structure completely dislocated due to exit of employees across the board, the management should reconnect the organization hierarchy. Some of the unprofitable branches will have to be closed, as a further

process of rationalisation. Promotion and redistribution of work should take place. Training should be given to increase the overall productivity. With the large number of employees taking VRS the productivity will increase though the efficiency would not go up immediately. The banks should take up effective manpower planning with a lot more training. At the same time, computers should be installed. Routine and unskilled jobs can be outsourced. As technology slowly replaces the unspecialized jobs, the process of showing the door to the employees does not arise if outsourcing is done. 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 [from a speech delivered by Mr.Bimal Jalan, Governor of R.B.I, on the title "Indian Banking and Finance: Managing New Challenges"] 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. This gives the backdrop. A comprehensive analytical article on VRS ensuing in the next three pages is contributed by Ms.K.R.Chitra, a student of M.Phil of Kerala University.

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

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. The study is made under the following table of contents. Table of Contents 1. 2. 3. 4. 5. 6. Rationale of the Philosophy of VRS The Industrial Culture & Labour Legislation of India The need and urgency for PSBs to downsize their work-force Methodology of planning and designing the scheme The Economics of the Scheme How the scheme was implemented by PSBs in General and by SBI and SBT in particular 7. Merits of VRS as a strategy towards manpower planning 8. The Shortcomings of the scheme in perception & implementation 9. >Analysis of the merits of the decision of VRS Optees who preferred to leave -A review of their Post VRS prospects 10.An objective assessment of Scheme

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 rationalisation 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 for 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 19992000, 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 hightech 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 twentyseven public sector banks were reporting profits (UCO Bank was incurring losses from 1989-90). In the first post-reform year, i.e., 1992-93, the profitability of the PSBs as a group turned negative with as many as twelve nationalised banks reporting net losses. By March 1996, the outer time limit prescribed for attaining capital adequacy of 8 per cent, eight public sector banks were still short of the prescribed level." Consequently PSBs in the post reform period came to be classified under three categories as

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

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

Substantial recapitalisation of the affected PSBs (total outlay around Rs.21,000 Crores), deregulation of control by Government of India and RBI, allowing total discretion for the Banks to raise fresh capital from the market, progressive reduction in SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio) obligations of the banks and several other measures were introduced in the Nineties to tune Indian Banking to the level of the International players. Speedy process of computerisation of banking operations and application of Information technology was undertaken by the State-owned Banks. But the set-back of eroded profitability of the Banks could be rectified only by neutralising the two major problems inherited by the PSBs as a past legacy as under:

Huge unproductive labour rendered surplus on account of rationalisation and computerisation of operations Mind-bogging accumulation of non-productive assets (gross estimated at around Rs.1,00,000 Crores of failed credit rendered sticky and difficult of recovery).

Considering the second problem i.e. non-performing assets (NPA) is the outside the scope of this study. But to redeem the banks from the recurring burden of surplus manpower, the Government accepted the one-time solution of Voluntary Retirement Scheme. Methodology of Planning and Designing the Scheme Government in the middle of the year 2000 cleared a uniform Voluntary Retirement Scheme (VRS) for the banking sector, giving public sector banks a seven-month time frame. The IBA has been allowed to circulate the scheme among the public sector banks for adoption. The scheme would remain open till March 31, 2001. It would become operational after adoption by the respective bank board of directors. No concession was made to weak banks under the scheme. The scheme was envisaged to assist banks in their

efforts to optimise use of human resource and achieve a balanced age and skills profile in tune with their business strategies. The text of the VRS scheme and guidelines as approved and issued by the Government of India are appended in the Annexure. As per the scheme all permanent employees with 15 years of service or 40 years of age will be eligible to avail of it with exgratia amounting to 60 days salary. Employees eligible for VRS, but who do not want to avail themselves of the scheme, have been provided with the option of choosing to go on a sabbatical for 5 years While the right of refusal to give voluntary retirement has been granted to the bank management, recruitment against vacancies arising through the VRS route has been disallowed. Banks have been asked to undertake a complete manpower planning exercise before offering the VRS scheme. As per earlier estimates the average outgo per employee under the banking VRS scheme was reckoned at the range between Rs. 3 Lakhs and Rs. 4 Lakhs. However, the aggregate burden on the banking industry is difficult to work out, as one cannot estimate how many employees would finally opt for the scheme. To minimise the immediate impact on banks, the scheme has allowed them the stagger the payments in two instalments, with a minimum of 50 per cent of the amount to be paid in cash immediately. The remaining payment can be paid within six months either in cash or in the form of bonds. After implementation the average per head estimated cost for the entire set of 26 banks worked out to Rs 5.93 Lakh. For the 18 nationalised banks, the average cost has been estimated at Rs 6.70 Lakh, while for SBI and its seven associate banks, the figures work out to Rs 6.52 Lakh and Rs 5.72 Lakh respectively. The response to the VRS offer seems to have been much higher from officers, compared to clerical and other sub-staff. The estimated cost has been worked out on the basis of the exgratia payment that would be doled out to the applicants. This includes all payments under the scheme, excluding cost of regular terminal benefits for which banks are required to make provisions on an ongoing basis. PUBLIC sector banks took a hit of about Rs 7,490 crore on account of the recently concluded voluntary retirement scheme (VRS), according to a

consolidated picture compiled by the Ministry of Finance. The scheme came to a close on March 31,2001. Out of the Rs 7,490 crore, the cost for the 18 nationalised worked out to Rs 5,373 crore, while for SBI and its seven associate banks (SBI group), it would work out to Rs 2,117 crore. This is as per initial estimate on 31.03.2001, when the scheme closed. The total outgo inclusive terminal benefits already provided for was estimated at Rs.10,000 Crores. The Economics of the Scheme Let us consider the example of a bank with an assumed strength of 50000 workers, which has calculated that 40,000 employees are sufficient to carry on existing the activities of the Bank and 10,000 employees considered as surplus and no longer needed. It is assumed that these 10,000 employees have an average service span of 15 years and each draw average salary of Rs.1.20 Lacs per year. As the employees are deemed surplus, and the work could be carried on without them, the return to the Bank on account of the employees is NIL, while the revenue expenses incurred per year on the surplus employees is Rs.12,000 Lacs (or Rs.120 Crores). If the Bank decides to compensate each employee with 60 months wages (at Rs.10,000/- p.m. and send them under voluntary retirement scheme, it would incur a one time expense of Rs.600 Crores. As government has permitted to amortise this expenditure on a deferred basis over five years, the expense for each year is Rs.120 Crores, while saving is also Rs.120 Crores. In the first five years the Bank breaks even with no loss or gain and from the 6th year onwards it saves Rs.120 Crores for the next ten years. The net spread over benefit to the Bank during the entire span in the aggregate is Rs.1200 Crores. The employee would have earned Rs.18 Lacs in his remaining service for the next 15 years, which he chooses to forego. The present discounted cash value of the amount at the rate of 9% p.a. comes less than Rs.4 Lacs and against this he gets Rs.12 Lachs (assuming he has completed 20 years of service already and eligible for 120 months compensation). A progressive and forward-looking employee can also utilise the opportunity to retrain himself in his own discipline of banking and finance by undergoing further qualifying training and passing professional courses and equipping himself with higher knowledge and expertise during the next 2 or 3 years and reenter 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 middlemanagement 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. Particulars Total Strength Officers Clerical Subordinate Aggregate 60536 117184 59784 237504

Those opted VRS %age VRS to Total Strength

6694 11%

11271 9.62%

2819 4.72%

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 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 Clerical Subordinate Aggregate 3150 534 16.96% 7023 299 4.28% 2964 82 2.77% 13137 915 /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. Employees against whom Disciplinary Proceeding are contemplated/pending or are under suspension. Employees appointed on contract basis. Any other category of employees as may be specified by the Board.

ii. iii. iv.

2.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. 3. Other Benefits i. ii. iii. 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.

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 instalments, 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.