VRS IN PUBLIC SECTOR BANKS

VRS in public sector banks

n the present globalised scenario, right sizing of the

manpower employed in an organisation has become an

important management strategy in order to meet the

increased competition. The voluntary retirement scheme

(VRS) is the most humane technique to provide overall

reduction in the existing strength of the employees. It is a

technique used by companies for trimming the workforce

employed in the industrial unit. It is now a commonly used

method to dispense off the excess manpower and thus improve

the performance of the organisation. It is a generous, tax-free

severance payment to persuade the employees to voluntarily

retire from the company. It is also known as “GOLDEN

HANDSHAKE” as it is the golden route to retrenchment.

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In India, the Industrial Disputes Act, 1947 puts restrictions on

employers in the matter of reducing excess staff by

retrenchment, by closures of establishment and the retrenchment

process involved lot of legalities and complex procedures. Also,

any plans of retrenchment and reduction of staff and workforce

are subjected to strong opposition by trade unions. Hence, VRS

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was introduced as an alternative legal solution to solve this

problem. It allowed employers including those in the government

undertakings, to offer voluntary retirement schemes to off-load

the surplus manpower and no pressure as such was put on any

employee to exit. The voluntary retirement schemes were also

not subjected to not vehement opposition by the Unions, because

the very nature of its being voluntary and not using any

compulsion. It was introduced in both the public and private

sectors. Public sector undertakings, however needs to

obtain prior approval of the government before offering

and implementing the VRS.

VRS means Voluntary Retirement Scheme. Employers who want

to reduce the employee strength give some employees the option

to retire before normal retirement age. The employees may or

may not accept this option. Those who accept the option

are VRS employees. The VRS employees get the

compensation. They receive lump sum from the employers

including VRS compensation, Provident Fund, Gratuity,

Leave Encashment etc. The VRS employees have to

depend on income from the investments of the lump sum

for their future life.

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A business firm may opt for a voluntary retirement

scheme under the following circumstances:-

Due to recession in the business.

Due to intense competition, the establishment becomes

unviable unless downsizing is resorted to.

Due to joint-ventures with foreign collaborations.

Due to takeovers and mergers.

Due to obsolescence of Product/Technology

Changes in technology, production process, innovation, new

product line

Realignment of business - due to market conditions

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Procedure for Voluntary Retirement Scheme followed by

the employer

The employer has to issue a circular communicating his decision

to offer voluntary retirement scheme – mentioning therein

The reasons for downsizing

The age limit and the minimum service period of employees

who can apply

The benefits that are offered. It should be noted that

employees who offer to retire voluntarily are entitled as per

law and rules the benefits of Provident Fund,’ Gratuity and

salary for balance of privilege leave up to the date of

their retirement, besides the voluntary retirement

benefits.

The right of an employer to accept or reject any application

for voluntary retirement.

The date up to which the scheme is open and applications

are received for consideration by the employer.

The circular may indicate income tax incidence on any

voluntary retirement benefits which are in excess of Rs. 5

lakhs, which is maximum tax free benefit under such

schemes.

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It should also indicate that those employees who opt for

voluntary retirement and accept the benefits under such

scheme shall not be eligible in future for employment in

the establishment.

Procedure for VRS to be followed by the employee

An eligible employee may submit request opting for

Voluntary Retirement under the scheme to the Competent

Authority through proper channel in a prescribed proforma

which shall be available in the PSU.

The Competent Authority may after considering the

application and after giving an opportunity to the applicant; of

being heard, pass a speaking order within a period of 3

months, either accepting or rejecting the request.

In case the Competent Authority fails to pass an order

rejecting the request by the due date as given above, the

request would be deemed to have been accepted and the

employee would be retired.

A copy of every order made under above shall be given to

the employee.

An employee who is aggrieved by an order of rejection

may within thirty days from issuance of such orders file

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an appeal before the Administrative Secretary of the

Department under which the concerned PSU falls, whose

decision shall be final and binding.

The date of acceptance of VRS by the competent authority

will be treated as date of voluntary retirement.

Steps to be taken for introducing and implementing

voluntary

retirement scheme

If the company is a public sector undertaking obtain

approval of the government.

Identify departments/employees to which VRS is to be

offered more.

If there is a union of employees in the establishment involve

the union by communicating to them the reasons, the target

group and the benefits to be offered to those who opt for the

scheme.

Terms of VRS and benefits to be offered are to be mentioned

in the circular or communication to employees and decide the

period during which the scheme is to be kept open.

Counseling employees is an essential part of

implementing the scheme. The counseling should

include what the retiring employee can do in future i.e.

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rehabilitation, how to manage the funds received

under the scheme.

After receipt of applications for accepting VRS, scrutinize,

decide whose applications are to be accepted and those

whose are not to be accepted.

For those whose application are to be accepted prepare a

worksheet showing the benefits each will receive

including other dues like Provident Fund, gratuity and

earned leave wages for the balance un-availed earned

leave, and tax incidence should the VRS amount

exceed Rs. 5 lakhs.

The challenges in implementing employees Exit

The reasons and need to introduce VRS should be discussed

with all management staff including top management.

The effect of downsizing including on the work or activities of

the establishment carried on is to be considered i.e. post

reduction operations to be carried on should also be planned -

post plan reduction employee deployment.

Ensure all concerned employees and managers participate in

the decision making to down size.

The downsizing plan should match with the Strategic plans of

the company.

Transparency should be seen and used in choice of persons

to be retired.

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Be prepared to manage the after effects of the down

sizing - both social and psychological.

Motivate employees who will stay with the company, remove

their apprehensions and fears, if any.

Provide professional assistance to employees who agree to

accept VRS to plan their post retirement, activities and

financial management including, out placement.

The VRS should be made attractive and no pressures should

be used to ease out people.

Merits of voluntary retirement Scheme

There is no legal obstacle in implementing VRS - as is

predominantly encountered in retrenchment under the labour

laws.

It offers to the employee an attractive financial

compensation than what is permitted under retrenchment

under the law.

Voluntary nature of the schemes precludes the need for

enforcement which may give rise to conflicts and disputes.

It allows flexibility and can be applied only to certain

divisions, departments where there is excess manpower.

It allows overall savings in the employee costs thus lowering

the overall costs.

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Demerits of VRS

To a certain extent it creates fear, a sense of uncertainty among

employees. Sometimes the severance costs are heavy and

outweighs the possible gains. Trade unions generally protest the

operation of such schemes and may cause disturbance in normal

operations. Some of the good, capable and competent employees

may also apply for separation which may cause embarrassment

to the managements.

It is found in practice that organisations may have to repeat the

scheme if there is no response or poor response to the scheme by

the employees. However, there are instances when the

managements have really made the schemes very attractive by

making it “Golden Hand Shake.”

It is incumbent on the establishments that they do not

recruit similar staff immediately after the implementation

of voluntary retirement scheme. Such recruitment, in spirit

and essence is contrary to the principle of staff being excessive or

surplus. In case disciplinary action is pending against an

employee, who has sought Voluntary Retirement, the Disciplinary

Authority shall, after considering all facts, convey to the

Competent Authority whether the request of the employee should

be accepted or not. In case the Disciplinary Authority decides that

the request of such an employee for Voluntary Retirement be not

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accepted, the same shall be communicated to the employee in

writing and he shall have a right to make an appeal as provided

under section 9 (v).

Amount of Ex-gratia

An employee seeking Voluntary Retirement under the scheme will

be entitled to the compensation consisting of salary of 35

days for every completed year of service and 25 days for

every year of the balance of service left until super

annuation. The compensation will be subject to a minimum of

Rs.25,000/- or 250 days salary whichever is higher.

However, this compensation shall not exceed 80% of the sum

of the salary that the employee would draw at the prevailing

level for the balance of the period left before superannuation. In

case an employee is governed by a retiring/superannuation

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pension scheme the disbursement of pension shall commence

from the month next to the date an employee would have retired

in the ordinary course.

100% of the amount of ex-gratia payable to an employee on

opting for Voluntary Retirement under this Scheme would be

paid in cash within 60 days from the date of his relieving.

An employee whose offer for Voluntary Retirement under the

Scheme is accepted will be eligible, apart from the ex-gratia

defined above, to any benefit that would have been available to

him upon superannuation as per the policy extant in the PSU prior

to the date of notification of this scheme. It is clarified,

however, that an employee shall not be eligible for both

retrenchment compensation and ex-gratia under this

scheme but shall have to opt for one of the two.

General Conditions

Arrears of wages due to general revision of pay scales etc.

shall not be included in computing the eligible amount.

Only completed years of service shall be reckoned for

arriving at the minimum eligible service.

Fraction of service of 6 months and above shall be reckoned

as one year for the purpose of calculating the ex-gratia.

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Fraction of service less than 6 months will be ignored for the

purpose of calculating the ex-gratia.

The salary shall be calculated on the basis of last salary

drawn by an employee/officer.

No employee shall be allowed to withdraw the request made

for voluntary retirement under the scheme after it has been

accepted by the Competent Authority.

The Competent Authority shall have absolute discretion

either to accept or reject the request of an employee seeking

Voluntary Retirement under the scheme. The reasons for

rejecting the request of any employee seeking Voluntary

Retirement shall be recorded in writing by the Competent

Authority.

All payments under the scheme and any other benefit

payable to an employee shall be subject to the prior

settlement/re-

payment in full of loans, advances, returning of Govt.’s

property and any other outstanding due against him and

payable by him to the PSU concerned.

All payments made under the scheme shall be subject to

deduction of tax at source as per Income Tax Act 1961

wherever applicable.

An employee who seeks voluntary retirement under this

scheme shall not be eligible for re-employment in Govt., any

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PSU or any of its subsidiaries. A complete data/record, on

website of all those employees of the Public Sector

Undertakings / Corporations, who have availed the VRS shall

be retained. While making future recruitments no person out

of these shall be retaken in service.

In the event of the death of an employee, whose

request for voluntary retirement under the scheme has

been accepted, the compensation, which would have

become due and payable to the deceased employee,

shall be paid to the person nominated to receive such

dues.

The benefits payable under this scheme shall be in full and

final settlement of all claims of whatsoever nature, whether

arising under the scheme or otherwise to the employee (or his

nominee in case of death). An employee who voluntarily

retires under this scheme will not have any claim against the

PSU concerned of whatsoever nature and no demand or

dispute or difference will be raised by him or on his behalf,

whether for re-employment or compensation or back wages

including employment of any of his relative on compassionate

grounds.

Eligibility criteria in general

The companies can frame different schemes of voluntary

retirement for different classes of their employees. However,

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these schemes have to conform to the guidelines prescribed in

rule 2BA of the Income-tax Rules. The guidelines for the

purposes of section 10( 10C ) of the Income-tax Act

have been laid down in the rule 2BA of the Income-tax

Rules.

The guidelines provide that the scheme of voluntary

retirement framed by a company should be in accordance with

the following requirements, namely:

It applies to an employee of the company who has

completed ten years of service or completed 40 years of age

It applies to all employees (by whatever name called),

including workers and executives of the company

excepting Directors of the company

The scheme of voluntary retirement has been drawn to

result in overall reduction in the existing strength of the

employees of the company

The vacancy caused by voluntary retirement is not to be

filled up, nor the retiring employee is to be employed in

another company or concern belonging to the same

management

The amount receivable on account of voluntary retirement of

the employees, does not exceed the amount equivalent to one

and one-half months salary for each completed year of service

or monthly emoluments at the time of retirement multiplied

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by the balance months of service left before the date of his

retirement on superannuation. In any case, the amount should

not exceed rupees five lakhs in case of each employee, and

The employee has not availed in the past the benefit of any

other voluntary retirement scheme.

.

Application for voluntary retirement scheme

To

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---------------------------------------------------------------------------------------------------------------------------------------------

Sub:- Application for Voluntary Retirement under Scheme notified vide Circular

No……………………………………….. Dated………………

Sir,

1. With reference to Circular no……………………………dated…….......... on the abovesubject. I hereby opt for release under the Voluntary Retirement Scheme.

2. I agree with the terms & conditions as contained in the aforesaid circular.

3. I may kindly be relieved by ……………………….. in accordance with the above Scheme and the various benefits as provided therein may be paid to me on the date of release. My particulars as on date are as under:

NameEmployee No.Father’s/Husband nameDate of BirthDate of joining the CorporationTotal service in the Corporation in Completed years

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DesignationScale of PayBasic PayDADeclared Home TownDetails of Family Members residing with me (along with date of birth)1. ……………………………………………2. …………………………………………………3. …………………………………………………4. …………………………………………………Present PostingAfter retirement I wish to settle at :

Thanking YouYours faithfully

( )Name & Signature of the employee.

Date:Name, Designation, Addresses and Signatures of two Witnesses:1. ……………………………………………………2. ……………………………………………………Certified that I have neither applied nor I have the intention to apply for employment in anyPublic Sector Enterprise/Governemtn Organization after Voluntary Retirement.

( )Name & Designation of the employee.

Date:

FOR OFFICIAL USE

The Application of Sh./Smt/Km…………………………………… ………… for release under

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Voluntary Retirement Scheme has been verified. The application of Sh./Smt./Km…………………………………………. may be accepted/may not be accepted for reasons specified on aseparate sheet.*

Date ………… (Name/Designation and

Signature of Head of theDepartment)

* strike out whichever is not applicable.

Forwarded for acceptance through

Head of the Deptt.

Application of Sh./Smt./Km. ……………………...……………. for release under VRSaccepted/not accepted.*

CMD/Head of the project.

Date : ……………….

* strike out whichever is not applicable.

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s banking reform gathered speed and the prospect of

government hand-outs diminished, it became clear that

banks could no longer afford to be overstaffed.AVRS in Banks was formally taken up by the Government in

November 1999. According to Finance Ministry on the basis of

business per employee (BPE) of Rs. 100 lakhs, there were 59,338

excess employees in 12 nationalised banks, while based on a BPE

of Rs. 125 lakhs the number shot up to 1,77,405. On a

conservative estimate, it could be said that the public sector

banking system was overstaffed by roughly 1,00,000 people.

Hiring and firing in the public sector banking industry is a highly

unionised business, subject to protracted negotiation with the

Indian Banks Association (IBA). After years of deliberation, in

November 1999, the government sanctioned the release of the

VRS to the IBA. Between November 15, 2000 and March 31,

2001, all public sector banks, except Corporation Bank,

introduced VRS.

UNDER severe pressure from the staff of Corporation Bank to

throw open an exit route, it considered the option of approaching

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to the Government to devise a special Voluntary Retirement

Scheme (VRS) to allow only a highly selective offer.

The special scheme seeked to limit the offer to only those

sections of the staff that were identified as surplus after a

thorough in-house exercise on the bank's human resource

requirement.

Corporation Bank felt that it might be difficult for the bank to

come up with a blanket VRS offer for its staff in the same vein as

was done by other PSU banks since a recruitment drive is on at

the other end. The bank was hiring fresh hands, both in the

officer and clerical grades, on account of its expansion

plans drawn up with Life Insurance Corporation of India

(LIC).

According to sources, the bank had just completed the

recruitment process for taking on its rolls an additional 125

officers and 160 clerical staff. The persons recruited will be

deployed at the large number of extension counters that the bank

proposes to open within the premises offered by LIC.

"We are still unsure whether it is proper to offer a general VRS for

the staff while a drive to recruit more has been taken up,"

Corporation Bank officials said.

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Corporation Bank was the only public sector bank that chose to

stay out of the recent industry-wide VRS exercise that resulted in

Government-owned banks shedding nearly 11 per cent of its

earlier staff strength.

Under the uniform VRS scheme devised by the Indian Banks'

Association (IBA) for the PSU banks, the offer could be availed by

all who met the criteria of minimum age or service requirement.

However, the IBA scheme did provide the management with the

final say in the matter of accepting a VRS application by allowing

the bank to reject applications received from staff with specialised

skills that the bank might find difficult to replace.

Corporation Bank was not to be in the mood to avail this option

since it wanted to avoid the possibility of big queues at the VRS

window. "If we finally decide to have a VRS in the bank we might

approach the Government for being allowed to make a special

offer that would be limited to only those pockets which are

identified as surplus," bank officials told Business Line.

The following figure shows the percentage of employees

who opted for VRS before March 2001 in 26 public sector

banks. As seen below, the portion in red denotes the

percentage of the number of employees who opted for

VRS.

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In 2000-01, the staff cost of all the 27 public sector banks

(including Corporation Bank, which did not opt for VRS), was Rs

21,050 crore. By 2001-02, staff costs had dropped to Rs 18,959

crore.

Finally the Government then had cleared a uniform

Voluntary Retirement Scheme (VRS) for the banking

sector, giving public sector banks a seven-month time-

frame. The IBA had allowed the circulation of the scheme among

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the public sector banks for adoption. The scheme was kept open

till March 31, 2001. It was made operational after adoption by the

respective bank’s board of directors. No concession was given to

weak banks under the scheme. The scheme has been envisaged

to assist banks in their efforts to optimise use of human resource

and achieve a balanced age and skills profile in tune with their

business strategies.

VRS was implemented by 26 out of 27 public sector banks in

2000-2001. 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.

Banks were faced with cutthroat competition from the new

private sector banks, state-owned banks have taken to the task of

cutting costs very seriously. Despite a clear lead in terms of time,

clients and network, public sector banks lagged far behind the

new private sector in profitability. Their flab showed in their

bottom lines.

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Banks having implemented VRS were State Bank of India, Bank of

Maharashtra, Bank of India, Syndicate Bank, Oriental Bank of

Commerce, Punjab National Bank, Union Bank of India, Indian

Overseas Bank, Allahabad Bank, Andhra Bank, Standard

Chartered Bank, Vijaya Bank, Punjab & Sind Bank, Indian Bank,

Bank of Baroda,

Canara Bank, Central Bank of India, Corporation Bank, Dena Bank,

UCO Bank and United Bank.

Speaking to a business magazine, Purushan Vava, chief

manager, Punjab National Bank said, "The whole idea of

implementing VRS is to save costs and improve our productivity."

About 7,000 employees of Punjab National Bank opted for VRS. In

a special arrangement with their employees, the PNB

management had issued bonds equivalent to 50 per cent of the

ex-gratia payment made to the VRS employees, encashable after

5 years.

NS Nayak, general manager, Bank of India, agrees with Mr.

Vava when he says, "With computerised systems having been

installed, we realised we were carrying excess flab that was

adversely affecting our bottom line. Therefore we decided to

implement VRS." Mr Nayak disclosed, his bank had identified

10,000 excess people out of which 7,766 availed the VRS scheme.

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While 7,400 had already been relieved, the case of balance 366

was decided on disciplinary grounds.

India's largest bank, State Bank of India, had also implemented

VRS and about 21,000 employees out of a total of 233,000 opted

for the scheme in fiscal 2001, according to SBI sources.

Implementation of VRS also helped improve efficiency. RM

Nayak, general manager, credit & international banking, Bank of

Maharashtra told a business magazine, "Not only has our bank

now become more customer friendly after implementing VRS, it is

also more profit oriented largely because the average age of our

employees has fallen to 49 from about 55 a few years ago."

Similarly for Bank of India, the average age has come down to 49

from about 54 a few years ago.

Despite the fact that banks incurred huge capital costs and cash

outflows during the ongoing VRS scheme, they simultaneously

saved a lot of recurring costs and cash outflows which positively

affected their profits and improved profitability.

Paresh Kothari, an analyst on the banking sector with

Khandwala Securities said, "Impact of VRS has already been

discounted and factored in the current stock prices by the

market but in the long run the overall impact on the share

prices will be very positive." He said costs will come down and

profits will go up, both bullish factors for stock markets.

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Clearly, cost cutting is set to have its impact on banks' profits as

well as profitability and it is only a matter of time before the

frenzy for bank shares returns to the stock markets.

Said Mr Vava, of Punjab National Bank, "Bank employees who

have availed of VRS are highly educated and experienced and

have taken into account all consequences of opting for an early

retirement." Agrees NS Nayak of Bank of India, "Bank employees

are aware of the risks of early retirement but they are sufficiently

educated and experienced not to make any serious mistakes"

However, Shankar Rele, director, Dash Management Services Pvt.

Ltd. thinks otherwise. Talking to a business magazine he said,

"With a large number of employees expected to be freed from

their regular jobs over a period of time through VRS, there is

bound to be an excess supply side situation in the job market.

These people will have to find new avenues for themselves and to

that extent this could lead to a social problem."

Mr Rele may well have a point. There have been many instances

in the past when people, with huge sums of money in hand have

ended up losers because of their inability to manage the same

well. It is a well-known fact that a lot of such sums have been lost

in the stock markets.

Mr Rele launched a project whereby he tried to help those who

had availed VRS to find alternate employment opportunities. He

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used his association with the insurance, bank and the IT sectors

to help such employee’s alternative employment. He also

provided adequate training to the employees in new areas where

required, with the help of psychologists.

The salient features

Eligibility

All permanent employees with 15 years of service or 40

years of age

The following employees will not be eligible for this scheme:

Specialists officers/employees, who have executed service

bonds & have not completed it, employees/officers serving

abroad under special arrangements /bonds, will not be eligible

for VRS. The Directors may however waive this, subject to

fulfillment of the bond & other requirements.

Employees against whom Disciplinary Proceedings are

contemplated/pending or are under suspension.

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Employees appointed on contract basis. Any other category

of employees as may be specified by the Board.

Amount of Ex-gratia

60 days' salary (pay plus stagnation increments plus special

allowance plus dearness relief) for each completed year of service

or the salary for the number of months service is left, whichever

is less

Other Benefits

Gratuity as per Gratuity Act/Service Gratuity, as the case

maybe.

Pensions (including commuted value of pension)/bank's

contribution towards PF, as the case may be.

Leave encashment as per rules.

Other features

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It will be the prerogative of the bank's management

either to accept a request for VRS or to reject the same

depending upon the requirement of the bank.

Care will have to be taken to ensure that highly skilled

and qualified workers and staff are not given the option.

There will be no recruitment against vacancies arising

due to VRS.

Before introducing VRS ,banks must complete their

manpower planning and identify the number of

officers/employees who can be considered under the

scheme.

Sanction of VRS and any new recruitment should only

be in accordance with the manpower plan.

Funding of the Scheme

Coinciding with their financial position and cash flow,

banks may decide payment partly in cash and partly in

bonds or in installments, but minimum 50% of the cash

instantly and remaining 50% after a stipulated period.

Funding of the scheme will be made by the banks

themselves either from their own funds or by taking

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loans from other banks/financial institutions or any

other source.

Sabbatical

Here, the employees were allowed to go on a long leave

without pay with an aim to cut costs. An employee/officer

who may not be interested to take voluntary retirement

immediately can avail the facility of sabbatical for five

years, which can be further extended by another term of

five years. After the period of sabbatical is over he may re-join

the bank on the same post and at the same stage of pay where

he was at the time of taking sabbatical. The period of sabbatical

will not be considered for increments or qualifying service for

person, leave, etc.

To minimise the immediate impact on banks, the scheme allowed

them the stagger the payments in two instalments, with a

minimum of 50 per cent of the amount to be paid in cash

immediately. The remaining payment can be paid within six

months either in cash or in the form of bonds.

Treatment of VRS expenditure

The Institute of Chartered Accountants of India (ICAI) urged the

Government to allow the expenditure incurred under voluntary

retirement schemes (VRS) as a deductible expenditure to the

extent they are written off in the profit and loss account. The

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institute advocated such a treatment irrespective of

whether the VRS amounts paid constituted the capital

expenditure or not.

The ICAI pointed out that many public sector enterprises as well

as banks who implemented VRS had to make payments of huge

amount to the employees who opted for VRS. ``There will be a

large outflow of cash and already banks are requesting the

Central Government to provide them with necessary funds for the

purpose of implementing VRS. It is logical therefore to allow the

entire amounts paid on such schemes as an allowable deduction

for the purpose of computing income of the respective

enterprises'', the ICAI said in a post-Budget memorandum.

The Finance Bill 2001 proposed a new Section 35DDA which

provides for amortisation of expenditure incurred over a period of

five years. Accordingly, such expenditure is deductible in five

equal installments.

According to ICAI, the provision in the present form would place

`great strain' on the cash resources of an enterprise which is

implementing a VRS as it would also have to pay income tax at

the applicable rate on the unamortised portions of such payments

.

On the proposed changes in the due dates for filing of income tax

returns, the ICAI has suggested that for all those cases where no

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statutory audit is required the returns may be filed by July 31 and

for those cases where statutory audit is required the returns may

be filed by October 31 for Assessment Year 2001-02. For

subsequent years, the institute recommended that the date for

those cases where statutory audit is required may be fixed as

September 30.

As regards the proposed provisions which would bring the large

amounts of non-competing monies received by employees in to

the tax net, the institute has pointed out that `where the

assessee receives such amount before joining employment, the

charging section 15 may not be able to cover such a situation in

the absence of employer-employee relationship''. ICAI has urged

the Government to address this issue through suitable changes.

But when they were planning to write off the VRS expenditure

over a few years, an expert opinion provided by the Institute of

Chartered Accountants of India (August 2000) proved to be a

proverbial spoke in the wheels. The opinion stated that out of

the components of the VRS package, the lump sum paid

on ex gratia could alone be treated as deferred revenue

expenditure and the other components have to be

expensed straightway.

For the banks, it was a strict `no no' as it would impact their

profits substantially. Hence they wanted their regulator to

32


prescribe an accounting treatment so as to take precedence over

the opinion given. The regulator readily obliged and through its

circular (dated January 30, 2001), allowed the banks to defray the

entire component of the VRS package including outflows on

account of gratuity and leave encashment to be treated as

deferred revenue over a period five year period.

Sensing that the tax deductibility on account of VRS would be

acceptable to the bankers if provided over a period (even though

the expenditure could be straightway claimed as revenue), the

Government for its part brought in Section 35 DDA into the Act

which provided tax deductibility over five years.

With the banks and the Government having sewed up all the

corners, the question arose as to the plight of the retirees. As a

sop to them, Section 10 (10C) was brought into the

Income tax Act, wherein any amount received at the time

of retirement was exempt to the extent of Rs.5 lakhs. This

was apart from the gratuity and leave encashment

benefits available.

"Even after the VRS is implemented, some of the banks are still

over-staffed. Productivity is still low. Ideally, the VRS should be an

annual phenomenon," said the chairman of a large public sector

bank. Incidentally, the finance ministry stayed away from the

entire exercise. The Indian Banks' Association devised the

33


formula, which was accepted by the industry after a formal

vetting of the banking division of the ministry.

Employees over 45 years of age were eligible for the 'generous'

scheme which offered two months' salary for every year

completed or the residual service period, which ever is lower.

Post VRS, the public sector banks were finding it tough to run

operations efficiently as there were staff shortages at some

pockets. Plans were afoot to restructure the organisation by

merging or closing some branches and abolishing at least one tier

of the organisational structure (either zonal or regional offices) to

avoid duplication of work and slow decision making. Nevertheless,

productivity has improved due to downsizing.

At Punjab National Bank, for instance, business per employee has

risen by as much as 34 per cent to Rs 14 million in the last one

year. PNB chairman SS Kohli, who is also the chairman of the

Indian Banks' Association, attributes the growth in BPE to the

success of the separation scheme. Together, the 27 public sector

banks showed a 26 per cent growth in BPE, which rose to Rs 15

million at the end of March 2001 as against Rs 12 million in 1999-

2000.

34


any companies have been providing their employees

the option of voluntary retirement. This brings for the

employees a pile of money, the amount of which

depends on their present salary status, years of service, and their

age. With the large sum comes an equally large tax liability. And

employees are not often clear as to the tax provisions regarding

Voluntary Retirement Scheme (VRS). They also have to depend on

the employer for tax deduction at source on such payment.

Numerous judgements have been passed in the recent

past by the Madras High Court, and various tribunals have

provided relief to employees opting for VRS.

M

When the public sector banks came out with a scheme to reduce

their staff strength, they structured the financial package in such

a way that they had the best of the deals. They wanted minimum

impact of such payouts on their financials, sought tax

deductibility of the expenditure and did not want the payout to

strain their liquidity. The components of the package under the

Voluntary Retirement Scheme (VRS) included ex-gratia, gratuity,

35


pension, leave encashment and in some cases travel and

transportation reimbursement.

The banks were not worried about the tax deductibility of

the expenditure as they had several court decisions to

support their claim.

The Madras High Court had held that "payments made to

employees by way of gratuity, bonus, retrenchment

compensation or compensation for termination of service,

whether under compulsion of statute or voluntarily, cannot be

said to be unconnected with business, or as not being

commercially expedient, so long as the quantum of the payment

is reasonable, having regard to all circumstances relevant to the

business enterprise. Such payments have ordinarily to be

regarded as payments made to facilitate the carrying on of the

business of the assessee".

The Madras High Court on the aspect of VRS in had held, "When

the payment is made for the purpose of retrenchment of workers

it was for the purpose of reducing the staff and to bring about a

reduction in the wage bill as well. Therefore these were matters of

management pertaining to business considerations and

expediency and the expenditure incurred by the assessee in this

regard was for the purpose of business and also with a view to

maintaining good relationship with the labour and that the

36


expenditure had to be considered as having been laid out wholly

and exclusively for business purposes of the assessee. Therefore

the sum paid under VRS was deductible."

It has also been held by the Calcutta High Court that "the

payment of compensation to induce workmen to retire

prematurely is an item of expenditure incurred by the assessee

company on the ground of commercial expediency in order to

facilitate carrying on of business and is revenue expenditure and

an allowable deduction.''

But perhaps fearing a substantial drop in tax collection, the

Central Board of Direct Taxes (CBDT) came out with a Circular

(January 23, 2001) whereby the expenditure on VRS was termed

capital in nature on the ground that there was an enduring

advantage to the tax payers. All said and done, this circular was

on shaky grounds.

There were enough case laws which held that the circulars cannot

take away what is legitimately available under the law. There

were also decisions which stated that the Circulars from CBDT

would not bind the courts or the tax payers. Again various courts

including the Supreme Court maintained that circulars cannot

preempt a judicial interpretation. Armed with the above, the

banks were not too worried about the CBDT's circulars

37


Also the retirees thought that the lump sum paid, having been

based on the years of service served or remaining, as the case

may be, or as a payment in the nature of profits in lieu of salary

would fall within the ambit of Section 89(1) of the Income Tax Act,

which allowed a tax relief to lessen the burden of tax which arises

because of income relatable to a few years being received in one

stroke. In this scenario, banks wanted to cover one more angle in

the process, which was to ease the strain on their liquidity. Hence

they agreed to meet their commitment to the retirees in annual

installments and in some cases through issue of bonds. It was

then that all hell broke loose.

Since the banks paid the compensation in instalments, the

exemption under Section 10 (10C) of the Income-tax Act 1961

was restricted to first such annual instalment and the retirees

were denied the promised Rs. 5 lakhs exemption. To a great

extent, the instalments which followed had to suffer tax with no

exemption whatsoever.

Secondly, in some cases the tax department argued that the

annual instalments mainly meant the method of payment but the

income being accrued in its entirety in the year of retirement, the

entire compensation would have to suffer tax in that year. The

plight of the retirees was indeed sorrowful. , the law makers

wanted to restrict the exemption on the amount received to the

extent of Rs.5 lakhs in a person's career and hence introduced

38


certain words to that effect. These have been twisted out of shape

and the tax relief under Section 89(1) claimed by the retirees on

account of their tax burden going up because of the VRS package

was also denied.

It should be noted that while the banks and the Government took

enormous care to preserve their self interests, the retiree who

was without a job, with returns on his meagre investments

dwindling rapidly and with no social security cover, was left to

fend for himself.

Neither his former employer nor the union to which he belonged

nor the government which supported such grandiose schemes to

keep with the times, have come to their rescue till date. All that

they have witnessed is strict and cynical interpretation of law and

nothing else. Section 10(10C) of the Income Tax Act, 1961

provides for a one-time exemption to an employee opting for

voluntary retirement or termination of his service, in accordance

with any scheme of voluntary retirement to the extent of Rs

5,00,000. Further, where an exemption has been allowed to an

employee under this Section in any year, no further exemption

will be allowed under this Section in relation to any other year.

The guidelines in respect for claiming exemption under Section

10(10C) are provided under Rule 2BA of the Income Tax Rules,

1962. As per Rule 2BA, exemption under Section 10(10C) is

39


available to an employee only if the scheme of voluntary

retirement framed by the company or authority or co-operative

society or university or institute, as the case may be, or if the

scheme of voluntary separation framed by a public sector

company, is in accordance with the specified requirements which

are mentioned as under:

Eligibility for Rs 5-lakh exemption

The Voluntary Retirement Scheme has to meet the following

requirements:

It will apply to an employee who has completed 10 years of

service, or is aged over 40 years;

It applies to all employees (except directors) including

workers and executives of a company or of an authority or of

a cooperative society;

The scheme of voluntary retirement or voluntary separation

has been drawn to result in overall reduction in the number of

the employees;

The vacancy caused by the voluntary retirement or

voluntary separation is not to be filled up;

40


The retiring employee of a company shall not be employed

in another company or concern belonging to the same

management;

The amount on account of voluntary retirement or voluntary

separation of the employee does not exceed the amount

equal to three months' salary for each completed year of

service, or salary at the time of retirement multiplied by the

number of months of service left before the date of his

retirement or superannuation.

In case of a public sector employee opting for voluntary

retirement, the requirement that he should be at least 40 years of

age or should have completed 10 years of service, would not

apply if the proceeds are as per the scheme of voluntary

separation framed by such public sector company.When an

employee opts for voluntary retirement he has to consider the

taxability of all sums received. Generally the proceeds fall under

the following categories:

(i) Gratuity:

In case of emloyees of government and employees of local

authorities, the gratuity is totally exempt under Section

10(10C) of Income Tax Act. For other employees, gratuity is

exempt under Section 10(10C) up to Rs 3,50,000. Any

gratuity in excess of Rs 3,50,000 shall qualify for rebate

41


under Section 89(1).

(ii) Leave Encashment:

This shall be exempt under Section 10(10AA) to the extent

specified therein. Section 10(10AA) grants exemption for leave

encashment in respect of earned leave at the credit of the

employee at the time of his retirement, on superannuation, or

otherwise. Voluntary retirement shall be treated as retirement

otherwise.

(iii) Provident fund:

Payment received from provident fund shall be exempt under

Section 10(11) of the Income Tax Act.

(iv) For sums other than those referred to in (i), (ii) and (iii),

exemption under Section 10(10C) is available to the extent of Rs

5,00,000.

There was a lot of controversy about whether relief under Section

89(1) should be available to employees opting for voluntary

retirement for an amount in excess of exemption of Rs 5, 00,000

under Section 10(10C). According to the provisions of Section 89,

where an assessee receives any money in the nature of salary

because of which his total income is assessed at a rate higher

than that at which it would otherwise have been assessed, the

42


assessing officer shall - on an application made to him in this

behalf - grant such relief as may be prescribed.

Rebate for VRS over Rs 5 lakh

Compute the average rate of tax on the total income

including VRS receipts in excess of Rs 5 lakh in the year of

receipt.

Find out the tax on payment received under VRS in excess of

Rs 5 lakh at the average rate of tax computed in the first step.

43


Add one third of the amount received under VRS in excess of

Rs 5 lakh to the total income of each of the three preceding

years, and compute average rate of tax for these three

preceding years.

Find out the average of the three tax rates computed in the

third step; compute tax on the average rate on the amount

received under VRS in excess of Rs 5 lakh.

The difference in tax computed in the second and fourth

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

Below mentioned are the summarized income tax

provisions that the employee has to work out while opting

for voluntary retirement scheme.

44


Recently the Madras High Court decided in favour of the

assessee, and held that relief under Section 89(1) is available to

the employees opting for voluntary retirement, over and above

the exemption of Rs 5 lakh under Section 10(10C). The Madras

45


High Court - held that if an employee receives compensation at

the time of resignation, the amount could be regarded as salary,

and the assessee would be entitled to the relief provided under

Section 89. This principle rendered in the case of resignation

would apply as much to the case of voluntary retirement of an

employee from service. Further, the Income Tax Appellate

Tribunal - upheld the same contention, and held that relief under

Section 89 is available over and above Rs 5-lakh exemption under

Section 10(10C).

The example in 'Rebate for VRS over Rs 5 lakh' alongside shows

you how the relief can be computed. Moneys in the nature of

salary refers to amounts received in arrears or in advance and

includes receipt in any one financial year, of salary for more than

twelve months or any payment which is treated as profit in lieu of

salary being paid in arrears.

The receipts on voluntary retirement by an employee are taxed in

his hands under Section 17(3), that is profits in lieu of salaries.

Thus, the relief under Section 89 is also applicable to employees

opting for VRS after exemption under Section 10(10C) has been

exhausted. As mentioned earlier, VRS proceeds can run into large

sums of money.

Therefore it is important that one utilises the benefits available

under the Income Tax Act.

46


Investment of VRS amount

ith the advent of the Senior Citizens Savings

Scheme, those opting for retirement, voluntary or

otherwise, suddenly had a window of opportunity.WBasically, the SCSS are open for those opting for retirement

provided they are 55 years of age. However, the moot question

that such people face is obvious -- should they be opting for the

VRS (voluntary retirement scheme) in the first place?

Life presents very few occasions to an individual where a decision

taken has a great impact on not only his own future but also that

of his family members. An offer of VRS is one such important

occasion..

Let us take a live case of one such person, whose particulars are

provided in the table.

47


Analysis

The ex-gratia is exempt up to Rs

500,000.Assuming that the rest of

the amount is subject to tax at the

highest rate of 33.66 per cent, the

amount remaining in hand works

out at Rs 662,737.

[745,308 - 500,000 =

245,308]

[33.66% of 245,308 =

82,571]

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

Since the rest of the benefits suffer

very little tax, if any, the total

investible amount in hand is Rs 15,

74,590. Now the question is,

should this person continue in service or should he opt for the

retirement scheme?

For the sake of comparison, we shall ignore the taxes and the tax-

planning strategies that can be adopted.

48

TABLE

(a) Age 45 years 7 months

Service put in 26 years 2 months

Residual service 14 years 5 months

Current gross pay Rs 15,668

Entitlement for VRS

Ex gratia

Rs 745,308

PF Rs 346,910

Leave encashment Rs 151,050

Gratuity Rs 299,565

Pension commutation Rs 114,328

Total Rs 16,57,161

Monthly pension Rs 6,138


If VRS is taken

For abundant precaution, we shall assume a very conservative

interest rate of 8 per cent p.a., payable monthly, even when it is

possible to park investible funds in avenues yielding 9 per cent

p.a., payable quarterly.

At 8 per cent, on Rs 15,74,590 the interest will be Rs 10,497

every month. Add to that the pension. The total monthly income

will be Rs 16,635, which is Rs 967 more than the salary he is

earning at present. The future value of an annuity of Rs 967

received per month, at the end of 14 years and 5 months (which

is his period of residual service) is Rs 3,14,905.

Now, one immediate and obvious conclusion that the

above analysis throws out is that the employee will not be

required to sacrifice his financial lifestyle in case he opts

for the VRS. This is because his gross pay was Rs 15,668 per

month, whereas the aggregate of interest on the VRS amount and

the pension works out to Rs 16,635. Isn't it strange that a

person's income can be greater when he isn't working than when

he is?

49


However, one point hitherto not considered is that, if the

employee continues in his service, his salary will rise with

time and consequently, there will be incremental effects

on gratuity, Provident Fund, etc.

But on the other side of the coin, there will be no ex-gratia

of Rs 6,62,737 plus the future value of annuity of Rs

3,14,905, aggregating to around Rs 9.75 lakh (Rs

975,000). The possibility of the incremental values of these

benefits taken together with the increase in salary at the time of

normal retirement being substantially higher than the ex-gratia

offered right now certainly looms large.However, the following

additional factors have to be taken into consideration before

taking the decision:

Time is money

We know about the time value of money. But have we considered

the money value of time? This is a very important aspect,

neglected by many. Money has time value that is expressed in

terms of interest.

Similarly, time has money value. Unfortunately, this cannot be

accurately quantified and will heavily depend upon the future

events such as getting another job, starting a business, pursuing

a rewarding hobby, etc.

50


Residual benefits

Most employers continue to give some benefits to their retired

employees. These may be in terms of annual domiciliary medical

expenses, hospitalisation expenses with a high ceiling,

continuation of housing loan, allowing the employee to retain

their provident fund dues with their employer for a specified

period, etc.. .

Till about an year ago, the voluntary retirement scheme was an

anathema in the public sector banking industry, possibly the most

over-manned white-collar citadel ruled by trade union leaders.

51


MANAGEMENT VS EMLOYEES

Various bank unions have not been in favour of VRS being

implemented but they could do little because the amount of

money offered lured away their colleagues like honey attracts

bees. Said Mr Shanbhag, general secretary of PNB bank

union, "We are not happy. We had all along been opposing VRS

because we feel that our colleagues could face problems post

VRS. However we could do little because the government

enforced the scheme and employees lapped up huge sums of

money they were offered to them by the managements." Mr

Shanbhag said post VRS, replacements have been slow to come

by, which exerts additional pressure on remaining employees.

Bank managements have become jittery over the impact of

voluntary retirement schemes on the officer cadre, with trends

pointing to a depletion in rural branches, the north-east and even

in metros like Mumbai. Several members of the Indian Banks

52


Association (IBA) are now worried that the voluntary retirement

schemes announced by a host of banks will leave them with a

skewed staff-officers ratio.

According to a sample survey of the VRS applicants at various

public sector banks, over 80 per cent are officers. At some banks,

it is 85 per cent. The survey has also pointed out that over 80 per

cent are from officers posted at north eastern states and in rural

branches.

"Now, if a bank approves the VRS applications of even half

the number of officer-applicants, it will be forced to close

down a substantial number of its rural and north east

branches," pointed out an associate of IBA.

Around 15 public sector commercial banks have so far announced

VRS. Among them are Allahabad Bank, Bank of India, Bank of

Baroda, Bank of Maharashtra, Canara Bank, Dena Bank, Indian

Bank, Oriental Bank of Commerce, Punjab National Bank,

Syndicate Bank, Uco Bank and United Bank of India. Meanwhile,

the United Forum of Bank Unions, a group of nine major trade

unions, has done its own survey of the factors attracting officers

to the VRS.

53


The UFBU's co-convenor, Mr Ashoke Dutta, told The Financial

Express that the Union government had done a very effective

silent campaign to the effect that the retirement age of PSU

officers may be lowered to 58 years from 60 now. The

government cannot bring down staffs' retirement age, since they

have been appointed through agreements that specify a

retirement age of 60 years. But the officers are appointed via

notifications, with the government retaining the option to lower or

increase the retirement age.

According to Mr Dutta, in such a situation, the officers find a VRS

the most suitable option. Officers opting for a VRS get benefits on

the basis of a retirement age of 60. Officers who stay on may lose

two years of entitlements in case the retirement age is lowered,

Mr Dutta pointed out.

Another reason for the popularity of the VRS with officers is that

their actions are subject to scrutiny by outside agencies like the

Central Bureau of Investigation (CBI). The staff members' actions

are out of the purview of the CBI.

"So officers prefer to opt for a VRS at the first chance

rather than risking their service for some more years. In

fact, it has been the fear psychosis that has prompted the

officers to go for the VRS," Mr Dutta added.

54


These factor have played an especially important role at banks

like United Bank of India, Uco Bank and Indian Bank, the so-called

weak banks. Officers of these three banks were uncertain about

their future and therefore rushed for the VRS.

According to the president of the All India State Bank of India

Officers' Federation, Mr BB Das, apart from north east and rural

India, the number of VRS applications among the officers has

been quite high in Mumbai and Bangalore. "This is because the

job prospects in these two cities are bright and the VRS has paved

the way from the PSU banks to lose their cream to private

organisations," he said. He also said that the officers - unlike the

staff members - are liable to be transferred any time and this

factor has also played a role in the VRS issue.

STATE BANK OF INDIA EMPLOYEES

While the voluntary retirement scheme (VRS) package of State

Bank of India (SBI) benefited about 22,000 employees of the

bank, a significant number of officers about 11,000 were the

55


dejected lot since their applications for VRS package was rejected

by the management.

About 11,000 SBI employees of the officer cadre were not

given the package despite making an application. They

then formed an association _ SBIVRS Optee Officers'

Association _ to articulate their case and request the

management and the Government to consider their

applications.

The President of the SBIVRS Optee Officers Association,

Hyderabad, Mr Y.L. Marianna, told Business Line that apart from

various initiatives, there was no other option but to go to the

court as all their efforts to hold parleys and address the problem

did not materialise.'' Mr Marianna said that the congregation

resolved to go ahead with its action plan to achieve VRS to all its

member applicants who had been denied the package by the SBI

management on the ground that they were below 55 years of

age.

The association maintained that the SBI management abysmally

lacked human touch in its manpower planning and this resulted in

indelible frustration among its officers community. This

accumulated frustration and identity crisis had resulted in many

of the employees opting for the VRS package.

56


They opined that SBI did not live up to its image of being the

largest bank, while major banks, including Punjab National Bank,

Bank of India, Canara Bank, Syndicate Bank, Andhra Bank and

Dena Bank, had a very smooth VRS sail and granted it to almost

all of its applicants ranging between 15 and 22 per cent of the

total staff strength.

The association maintained that the SBI extended the VRS

package to barely about 10 per cent of the staff working to about

22,000 out of 2,33,000 employees. Of about 56,000 in the officer

cadre, about 18,000 had opted for the VRS. However, the bank

appro ved the package for about 7,000 officers only, Mr. Marianna

maintained.

While some of the loss-making banks had managed to come up

with attractive VRS packages, the association noted that SBI and

Bank of Maharashtra were among the two major banks which did

not live up to their true status and limited the percentage of

optees.

The aggrieved members of the association instituted suits

in several courts across the country. The management had

to take stock of the interim orders of the Guwahati and

Bangalore High Courts which came in favour of the

employees, the association said.

57


While the association resolved to take up the matter with the

Government, it expressed a view that the trade unions, have

always drawn support from the employees They said that the

threat of bringing down the retirement age from 60 years to 58

years was putting a lot of pressure on senior bank officials to opt

for the scheme.

In December 2000, SBI had formed a joint venture with the

French insurance company Cardiff, for entering the life

insurance business. The unions questioned the logic

behind diversifying the business and cutting down the

staff strength. They argued that this move would

significantly increase workforce burden and,

consequently, adversely affect customer service.

Justice Alok Chakraborty of the Calcutta High Court has dismissed a writ petition filed by the SBI (VRS) Optee Officers Action Group (Bengal), challenging the decision of the bank authority not to accept the voluntary retirement scheme (VRS) of all the officers of the bank.

In the petition it was alleged that the bank authority illegally

had not accepted the VRS for all the officers and that it

rejected the prayer for VRS without showing any reason.

The bank stated that if all the employees take VRS, the

58


functioning of the bank will collapse and that it is not in a

position to face the financial burden of over Rs 500 crore to

meet the claim of the writ petitioners.

CORPORATION BANK EMPLOYEES

When the option for VRS was granted to the public sector banks,

all the banks except corporation bank accepted it. Officers of the

Corporation Bank were set to write a new chapter in industrial

relations history by demanding an exit policy in the bank. They

went on a one-day token strike on March 30 2001 to press for

their demand for the introduction of a voluntary retirement

scheme. These officers were left out when the public sector

banking industry introduced the first ever VRS in 2000 which saw

91,970 bank employees accepting VRS.

This accounted for 11 per cent of the total number of bank

employees. Except for Corporation Bank, the entire industry (26

banks) introduced the scheme in 2000 and around 15 per cent of

the total work force or 1,26,280 employees had applied for VRS.

59


Corporation Bank appointed a committee of executives to look

into the unions' VRS demand. The committee - which was

assessing the manpower requirement of the bank - submitted its

report to the board of the bank in May 2001.

Corporation Bank had an employee strength of close to 11,000

out of which 8,315 were officers. The management was resisting

the demand for the introduction of a VRS as the bank needed a

bigger work force to support its expansion plans. In fact, the bank

was in the process of recruiting around 600 officers and clerks

over the next few months.

Industry sources, however, indicated that the bank management

was then open to the idea of a VRS - with some riders.

BANK OF BARODA

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

on a striking work for an altogether different reason. Four

employees' associations (All-India Bank of Baroda Officers'

Association, All- India Bank of Baroda Employees'

60


Federation, All-India Bank of Baroda Employees' Co-

ordination Committee & Eastern Regional Council of Bank

of Baroda Employees' Association) called for a strike

protesting the bank's move to rope in a consultancy firm

to draw up a business strategy. Initially, the firm was

appointed to chalk out an infotech strategy only.

This was just the beginning. PSU banks needed to

implement at least another round of VRS to reach a

respectable level of employee productivity.

61


istory of VRS up to the date of implementation by the

respective PSBs, which commenced on 01.09.2000, was

common for all the banks. This was because the

initiative for action was with the Government of India, Finance

Ministry and the environment that affected banks was externally

oriented creating nearly identical problems for all the banks, the

difference being only in magnitude. The incidence of individual

banks scheme became visible only after the initiative was shifted

to the respective banks to implement the scheme. In other words

the difference in VRS between bank to bank manifested only at

the point of implementation, i.e. when the results were achieved.

H

The package differed from bank to bank but had been

broadly structured around the "model" prescribed by the

IBA. There was no difference in the eligibility criteria of officers or

the quantum of compensation. Individual banks had discretion in

defining the category of employees, who were to be kept outside

the preview of VRS and who were not eligible to apply for the

same.

62


Individual banks also had the discretion regarding the mode of

disbursement. The model proposed that banks offer to pay 50 per

cent of the settlement in cash and the balance in bonds with a

lock-in period of three years. However State Bank of India

(SBI), the largest Indian bank, offered to settle fully in

cash. According to figures available by early February, of the

estimated one lakh and odd employees who offered to accept the

package, at least 33,000 were from the SBI. However SBI has

accepted VRS applications of only 20784, of which there were

6,694 officers, 11,271 clerical staff and 2,819 subordinates.

On a bank-wise break-up, SBI's estimated cost for VRS was

the highest at Rs 1,500 crore. And average cost per employee

worked out to Rs.6.52 Lacs. It was claimed that operating

expenses for SBI in 2001-2002 increased by only 3.64% mainly

due to savings in staff cost after Voluntary Retirement Scheme in

the last fiscal year.

The SBI is the largest bank in India in terms of network of branches,

revenues and workforce. It offers a wide range of services for both

personal and corporate banking. The personal banking services

include credit cards, housing loans, consumer loans, and insurance.

For corporate banking, SBI offers infrastructure finance, cash

management and loan syndication.

Over the years, the bank became saddled with a large workforce and

63


huge NPAs. According to reports, staff costs in 1999-2000 amounted

to Rs 4.5 billion as against Rs 4.1 billion in 1998-99. Increased

competition from the new private sector banks (NPBs) further added

to SBI’s problems.

Though SBI had 9,000 branches, a mere 22% of those (1935

branches) were connected through Internet. SBI’s net profit per

employee was Rs 0.43 million and SBI’s NPA level was around

7.18%

The table given below shows the data of other banks for

comparison with SBI’s.

TABLE I

A COMPARISON BETWEEN SBI & SOME NPBs

BANKNPAs/NET

ADVANCES

PROFIT

PER

EMPLOYE

E (Rs in

Million)

SBI 7.18% 0.43

HDFC 0.77% 0.96

UTI BANK 4.71% 0.69

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ICICI BANK 1.53% 0.78

GTB 0.87% 1.2

From the above table it is clearly indicated that SBI was far from

the standards that could be arrived from analyzing other banks

NPA’s and profit per employee.

Analysts remarked that the very factors that were once

hailed as the strengths of SBI - reach, customer base and

experience - had become its problems. Technological tools

like ATMs and the Internet had changed banking dynamics. A

large portion of the back-office staff had become redundant after

the computerization of banks. To protect its business and remain

profitable, SBI realized that it would have to reduce its cost of

operations and increase its revenues from fee-based services. The

VRS implementation was a part of an over all cost cutting

initiative.

SBI faced a lot of protest against VRS from its employees due to

varying reasons. Inspite of all such protests, SBI received around

35,000 applications for the VRS. Analysts pointed out that many

bank employees opted for the VRS due to the better employment

prospects. SBI had not anticipated such a huge response to the

scheme. While the VRS was mainly aimed at reducing the clerical

65


staff and sub-staff, the maximum number of optees turned out to

be from the officer cadre. The clerical staff was reluctant to go for

the VRS due to the low employment opportunities for them.

According to reports, the number of applications from officers

stood at 19,295, which meant that over 33 per cent of the total

officers in the bank had sought VRS.

While announcing the VRS on December 27 2000, SBI had

merely stated that the management would relieve only those

officer cadre applicants who had crossed the age of 55 years. The

bank also issued circular barring treasury managers, forex

dealers and a host of other specialized personnel, from

seeking VRS. Employees who had not served rural terms

were also barred from opting for the scheme. The VRS was

also not open to employees who were doctorates, MBA’s,

Chartered Accountants, Cost & Works accountants,

postgraduates in computer applications. Another category

barred from the VRS consists of employees who have

received training at any Indian Institute of Management,

the National Institute of Business Management, the Xavier

Labour Relations Institute and trainers who have

undergone training on behavioural sciences. Technical

training is also a disqualification - applying to those

trained in computer or information technology related

areas at specialised external institutes in India or abroad

66


and those with training in derivatives. According to highly

placed SBI sources, the original VRS and the restrictions that

followed have left hardly any significant department open to the

VRS. A source said that the aim of the VRS was to reduce the

large numbers of the award staff but most of the applicants were

officers. "So SBI came out with tough stipulations to discourage

the officers," an SBI official said.

In another circular, SBI mentioned that any break in service (i.e.

leaves availed on a loss of pay basis) would not be taken while

calculating the service period. The bank also restricted the loan

facilities to the personnel who had opted for the VRS. If an

employee wished to continue a housing loan after accepting VRS,

he was asked to pay interest at the market rate. After these

restrictions were introduced, only 13.4% of the officers were left

eligible for VRS instead of the earlier 33%.

The conditions laid down by the management faced strong

criticism from the officers who had opted for the VRS, but who

could not meet the prescribed criteria. They alleged that the bank

was practicing discrimination in implementation of the scheme

and that no other banks had implemented such policies and

denied the opportunity of VRS to officers who were willing to avail

the scheme.

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While the bank authorities considered SBI’s VRS agenda

meticulous, sources inside the bank strongly believed that the

bank should have phased out its VRS implementation because of

the disruptions it caused. For instance, in some cases, the bank’s

managerial employees had to share some clerical functions,

which delayed the clearance process. Irate customers of SBI

complained of the increased waiting time for cheque clearance

since there was shortage of manpower.

SBI faced flak not only for customer service but also for interest

lost on money transferred from various branches as delays in

remittance of cash snowballed to over five days with SBI too

understaffed to clear transactions in time. In normal cases, the

transfer takes place on the same day or the next day.

According to media reports, some of SBI’s problem centres

were Pune, Baroda, Surat, Panjim and, to a lesser extent,

Jalandhar and Jamshedpur. But one of the bank’s human

resource executives claims that there were no identified problem

centres as such and that the media reports were inaccurate. He

concedes, however, that the VRS resulted in some minor regional

imbalances, but these were tackled by SBI by rotating the

administrative staff to various branches wherever there was a

need to do so. SBI’s manpower problems were shared by all

public sector banks. State Bank of India is not only the largest of

the Indian Banks, but also it is the biggest Institution at the Global

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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 Officers Clerical Subordinate Aggregate

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

Particulars Officers Clerical Subordinate Aggregate

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%

SBI took a hit in its profits by charging VRS expenses to the tune of Rs 8.8 bn

in FY01. The bank's profits excluding VRS however jumped by 22%, in line..

(Rs m) FY00 FY01 Change 4QFY00 4QFY01 Change

Interest Income 222,009 260,034 17.1% 60,758 74,446 22.5%

69


Other Income 35,693 40,178 12.6% 11,322 14,782 30.6%

Interest Expenditure 152,726 177,556 16.3% 38,184 50,390 32.0%

Operating Profit (EBDIT) 69,284 82,478 19.0% 22,574 24,056 6.6%

Operating Profit Margin (%) 31.2% 31.7% 37.2% 32.3%

Other Expenditure 62,952 74,156 17.8% 19,008 24,319 27.9%

Profit before Tax 42,025 48,500 15.4% 14,888 14,518 -2.5%

Provisions & Contingencies 11,725 13,912 18.7% 718 -1,588

Tax 9,785 9,714 -0.7% 4,684 4,107 -12.3%

Profit after Tax/(Loss) 20,516 24,874 21.2% 9,486 12,000 26.5%

Provision for VRS - 8,832 - 8,832 -

Net Profit 20,516 16,043 -21.8% 9,486 3,168 -66.6%

Net profit margin (%) 9.2% 9.6% 15.6% 16.1%

No. of Shares (eoy) 526 526 526 526

Diluted Earnings per share* 39.0 30.5 72.1 24.1

P/E (at current price) 7.5 9.5

*(annualized)

SBI's topline grew by an impressive 23% in the fourth quarter of

the year. However margins were depressed and operating

expenses increased sharply. A 480 basis points drop in operating

margins in 4QFY01 could be attributed to the inability of the bank

to sustain yield on advances after a cut in deposit rates. ?

70


The cost to income ratio of the bank was also higher at 63% in

4QFY01 (56% in 4QFY00). But if we were to exclude an amount of

Rs 4.4 bn written off towards the one-time issue expenses of India

Millennium Deposits (to be redeemed at the end of five years, in

2005-06), the ratio declined to 57% in FY01 from 60% in FY00.

During the year SBI implemented a VRS plan to cut its operating

costs and improve efficiency levels. The total cost of the scheme

to the bank was Rs 23 bn. In FY01 the bank had made a provision

of Rs 8.8 bn and planed to write off the balance expenditure

equally over a period of four years.

SBI moved towards the right direction by implementing

the VRS, foraying into retail, technology upgradation plan

and entering into the insurance business. In future it was be

however difficult for the bank to operate at high margins

considering the increasing competition and improving quality of

services provided by other banks. Also, the bank will have to

provide a higher amount as provisions for non performing assets,

if the economic and industrial activity witnesses further

downtrend.

According to industry watchers, by 2010, the entire SBI

staff recruited between mid 1960 and 1980 would retire.

As a result, SBI would not have sufficient manpower to

71


manage over 9000 of its branches.

TABLE

CHANGE IN SBI’s STAFF STRENGTH

31-03-01 31-03-00 % change

Officers 52,558 59,474 -11.63%

Clerical 103,993 115,424 -9.90%

Subordinate 53,729 58,535 -8.21%

Total 210,280 233,433 -9.92%

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

branches and announced redeploy additional administrative

manpower (resulting from the merger of loss-making branches) to

frontline banking jobs. SBI also planned to reduce its regional

offices from 10 to 1 or 2 in each circle. In August 2001, it was

reported that a single officer had to take charge of 3 or 4

branches as the daily concurrent audit got affected.

Departments like internal audit, concurrent audit,

monitoring, inspection of borrowers had hardly any staff,

according to reports. It was reported that employees working in

branches that had a high workload went on work-to-rule agitation,

72


blaming the VRS for their problems. Analysts felt that SBI would

have to take serious steps to reorient its HRD policy to restore

employee confidence and retain its talented personnel. SBI had

many strong organizational strengths and an excellent training

system, but due to weak HR policies, it had lost its experts to its

competitors.

The employees of almost all the new generation private sector

banks were former employees of SBI. The bank’s well-defined

promotion policy was systematically flouted by the framers

themselves and, as a result, employees with good track records

were frequently sidelined. Many analysts felt that SBI was not

able to realize the critical importance of recognizing inherent

merit and rewarding the performers.

The above factors were cited as the major reasons for the success

of VRS in the officer cadres, who were reported to be demoralized

and de-motivated. The arbitrariness and insensitivity at the

corporate level had dealt a severe blow to the employees of the

organization. What remained to be seen was whether SBI would

be able to reorganize its HRD policy and retain its talented

personnel.

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An article dated 27 th may 2004 states the following..

“The State Bank of India (SBI) is likely to initiate a second round

of voluntary retirement scheme (VRS) in the next few months.

This time the bank will be targeting employees over the age

group of 55 years. It is understood that the proposal will be put up

before the board for approval.

The first round of VRS which was held about four years back was

also targeted employees of the same segment. Speaking to FE, a

senior SBI official said a final decision on the issue will be taken

after the core banking exercise which involves integrating the

branches.

As per a rough estimate, there were over 2 lakh employees of

which about 60,000 were officers. SBI officials said that 10 per

cent of the staff was of 55 years and above. “Recruitment activity

was at its highest during 1960s-end and early 70s. Therefore,

there was a large number of employees who had crossed 55

years of age,” a source added. SBI is likely to go ahead with the

VRS plan independently.

Meanwhile, the board is also likely to study the merger proposal

of the bank with its seven associate banks. The associate banks of

74


SBI include the State Bank of Patiala, Mysore, Hyderabad,

Travancore and Saurashtra among others. “We will seriously look

into the proposal and chalk a feasible plan to facilitate the

merger. The merger is the only solution as they cannot co-exist as

competitors in the market, particularly in view of globalisation

and foreign competition,” a senior finance ministry official said

UCO BANK

he board of directors of UCO Bank decided that an officer

may seek voluntary retirement from the service of the

bank if he had completed 20 years of service in the bank,

or attained the age of 50 years, or if he become physically or

mentally incapacitated in such a manner that he is not able to

discharge his duties in the bank.

TThe provision to regulation 19 of the United Commercial Bank

(Officers) Service Regulations, 1979, reads ``provided also that

nothing in this regulation shall be deemed to preclude an officer

75


employee from retiring earlier pursuant to the option exercised by

him in accordance with the rules of the Bank''.

An officer can seek voluntary retirement from the bank instead of

resigning basically for the following two reasons: If he resigns, all

leave to his credit lapses. However, in case of voluntary

retirement, he is deemed eligible, in the United Commercial Bank

(Officers) Service Regulation, 1979, to be paid a sum equivalent

to the emoluments of any period of privilege leave that he had

accumulated.

If he retires voluntarily, he is, as provided in Regulation 43 of the

UCO Bank (Officers) Service Regulations, eligible to claim

travelling allowance, baggage and other expenses for himself and

his family as on transfer from the last station at which he is

posted to the place where he proposes to settle down on

retirement.

This facility is not available in case of resignation of an employee

of the UCO Bank. The procedure and conditions for voluntary

retirement from the bank's service as approved by the board of

directors: The application and relevant documents for voluntary

retirement from the service of the bank shall be, in case of

officers working in divisions, routed through the respective

divisional offices. In case of officers posted at the head office,

76


such applications for voluntary retirement shall be routed through

the assistant general manager of the concerned department.

The VRS can also be availed under extraordinary circumstances,

which are within the satisfaction of the bank, compelling an

officer to seek voluntary retirement from the bank's services.

However, in such a case, the officer must have completed at least

15 years of service in the bank.

An application seeking voluntary retirement shall be made by an

officer in writing to the competent authority not less than three

months prior to the date from which he seeks retirement. The

application shall be supported by the relevant documents

wherever required.

In appropriate cases, the competent authority may, if he is fully

satisfied, reduce or waive altogether the period of three months

required for submission of application. It shall be supported by the

relevant documents. It shall be open to the competent authority

to withhold permission to an officer under suspension who seeks

the voluntary retirement scheme.

The officer seeking voluntary retirement from the service of the

bank shall give an undertaking not to take up any employment for

a minimum period of two years from the date of such retirement

without prior consent of the bank. Claims with regard to gratuity

77


and provident fund of an officer permitted to retire voluntarily

shall be settled as per the rules relating to it.

Central Bank of India

It launched its voluntary retirement scheme (VRS) for a period of

15 days commencing on February 22 to March 8, 2001. The VRS

payable to the extent of 50 per cent in cash and the balance 50

per cent in the form of bond.

Bank of Maharashtra

It accepted applications of 2,000 VRS optees 800 officers and

1,200 class III and IV employees. About 2,700 employees of a

total of about 16,000 had opted for the scheme. VRS costed it

over Rs 200 crore and reduced the annual wage bill by about Rs

56 crore.

78


Andhra Bank

It paid around Rs 160 crore in cash towards the voluntary

retirement scheme (VRS) of its employees, as against a

combination of cash and debentures issued by some public sector

banks. It received as many as 1,750 applications from its staff for

the VRS.

Bank of India (BoI)

They embarked on a major organisational recast exercise. After

the launch of the voluntary retirement scheme (VRS) which was

opted by 7,780 employees , the bank was set to abolish one tier

(zonal offices) from its four-tier organisational structure. The bank

79


now has three tiers -- branch offices, regional offices and head

office.

Canara Bank

They received an overwhelming response of around 8,500

applications to its voluntary retirement scheme that ended on

January 31 2000.

SECOND ROUND OF VRS

‘’IN a bid to further rationalise staff strength, the Government is

considering a second round voluntary retirement schemes (VRS)

for public sector banks. Some banks have asked for a second

round of VRS. It is under examination,'' said Ms Vineeta Rai,

Secretary, Banking and Insurance, while addressing an

international seminar on banking, organised by Indian Institute of

80


Bankers here. The first round of VRS helped banks reduce

manpower by 12-15 per cent.

`We have not reached the optimum,'' she said. The public sector

banks were able to bring down staff strength by over 1,00,000.

Many banks had said large manpower was putting `strain' on the

expenditure and was affecting their profitability, Ms Rai said.

‘`Banks have been asked to undertake manpower planning and

each bank has to assess its own requirements,'' Ms Rai said

declining to give any time frame for yet another round of VRS.

She also admitted that after first VRS, the vacancies were

filled up by promoting the existing staff with relaxation in

the norms, which had negated the purpose of VRS''. Ms Rai

said the need of the hour for the banking industry was to address

the issues of right size, right attitude and right skills.

BUT The second round of voluntary retirement scheme for public

sector bank employees is expected to be delayed for a while with

the government planning to link it to the wage settlement

negotiations.This is in contrast to the government's earlier stand

of letting banks decide on the introduction of the scheme

targeted at segments.

Additionally, the employees unions have proposed that the banks

should also give the employees a second chance to opt for a

81


pension scheme.A bank chief said the Indian Banks Association

had sent a draft pension scheme to the finance ministry.

Banks are, however, divided on the issue because some of the

bankers are of the opinion that the pension bill will outstrip their

wage bills over the next 5-6 years.On the other hand, some

bankers were in favour of the proposal because in the VRS that

was introduced by all public sector banks in 2001, barring the

Corporation Bank, a majority of the optees were accounted for

employees who had decided to go for a pension when the offer

was made to them in the mid-eighties.

Officials said a decision would be taken over the next few days.

They, however, said the second round of VRS could only be

offered around next year because the wage negotiations had just

started and the process was expected to last for a few more

months.

The Bank of India and the Central Bank of India have already

indicated that they will launch a second VRS for employees.

82


he banks implemented VRS with a view to enjoy all its

advantages but somewhere things didn’t went as per

planned and because of this many problems were faced

by the bank management, customers and the existing employees.

TCustomer inconvenience was the least of the problems

that banks suffered. There were disgruntled employees

throughout the industry. Of course, this state of affairs wass

inevitable; even the best-planned VRS’s has an impact on

employee morale. But it is also true that the exercise had left

several bank managements dissatisfied with the results in

business terms too.

To be fair, the exercise cannot be written off as a rampant failure.

To start with, it’s the first of its kind on this scale. It was also a

major move in an industry in which employment was almost

considered a sinecure. But the problems it has thrown up hold

important clues to what can go wrong when corporations

implement a golden handshake.

The State Bank of India, along with a number of other

nationalized banks, implemented a voluntary retirement scheme

for its employees. A large number of employees actually took

83


advantage of this scheme and sought premature retirement. In

consequence, the overall employment of the State Bank of India

shrunk. The consequences, unfortunately, are only too evident to

those who use the bank. There is now significant understaffing,

and consequent overwork of the remaining employees, with

obvious effects on the service. Transactions – even simple

matters such as withdrawing money from an account - which

earlier required a few minutes, can now take up to an hour. There

are usually crowds waiting at each counter, with more waiting

time and more mistakes.

The fault is not that of greater inefficiency of the

remaining workers, but that there are simply not enough

people left to do all the required jobs easily and

efficiently. What is worse is that the remaining workers

are now not just overworked but harried and anxious. The

same people who earlier would perform their functions pleasantly

and smilingly, are now tensed, rushed and even surly, as they

struggle to meet the demands of increasingly irritated customers.

Recently, two major multinational banks merged, in an example

of growing concentration of the world banking industry.

Obviously, that meant that the banks in India also had to merge.

This entailed the closing of some branches and the drastic

pruning down of staff in others, again through a Voluntary

84


Retirement Scheme which has focused on getting rid of active

union members.

The consequence, even in this newly merged multinational bank,

was a significant deterioration in service. Not only have the

number of employees dwindled, but experienced and skilled

workers had been replaced with raw recruits who had yet to learn

their work and were prone to many more errors. Many of the

bank’s customers found it extraordinary that a major bank, which

had always ensured great care in the details of its transactions,

was willing to live with such a situation – all in the name of

reducing staff in order to improve overall efficiency !

But for a whole range of services, both public and private, the

consumers of such services also lost from the process of reducing

the number of workers. There were real losses in terms of

delays, reduced capacity of the remaining workers to cope

with the greater load, resulting mistakes, and a more

oppressive atmosphere in the workplace.

In fact, the only real benefit from such downsizing was

usually be found in the balance sheets of the companies,

as they could show lower labour costs and therefore

possibly higher profits. This was what creates the competitive

pressure across an industry for other companies to follow suit,

and to try and reduce the number of their workers.

85


It is time to call the bluff of those who tried and make us believe

that downsizing increases efficiency. Instead, it is really a way of

shortchanging both workers and consumers, and increasing

profits at the expense of everyone else. The irony, of course, is

that when all employers try this approach, it leads to lower

economic activity in general, and as a result, for macroeconomic

reasons, profits do not rise either !

According to many, the timing of the cut-off date for

implementation of the VRS gave no room for the management in

most of the banks as they were too busy with the annual closing

of accounts as at the close of March 31. Most of the top

management functionaries in banks were engaged in statutory

audit and finalisation of balance sheet within the timeframe

prescribed, with the approval of their Boards and the like.

The public sector banks in India today are in deep trouble as their

bad debts (NPAs) are assuming gigantic proportions with no signs

of any serious attempt to recover them. Add to this the

unprecedented removal of workforce through the back doors, by

resort to VRS, CRS and such other unfair schemes, and a gloomy

picture emerges.

Explains a banking analyst: “Public sector banks have numerous

branches and the relocation of staff from one area to another was

not as easy as it seemed because the notice given to employees

86


was too short.” Says a former employee of the State Bank of

Maharashtra, “There’s no doubt that the VRS was mismanaged. It

left all branches short on staff and managers and the remaining

staff frustrated.’’

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

cases, many more people opted for VRS than the

managements had bargained for. In most banks, the

management had not planned the replacement of the

duties of the exiting staff.

For instance, in Vysya Bank, according to the union, the

percentage of employees who opted for VRS was twice the

expected 10 per cent. According to HR officials at Dena Bank, in

May 2001, Dena Bank lost around 3,842 employees due to VRS

(or roughly 25 per cent of its total manpower).

Most banks followed a time-consuming policy of filling in some of

the vacancies by mobilising some staff from branches with excess

staff. Says an ex-employee of the Union Bank of India, “The banks

in semi-urban and rural areas were hit badly owing to lack of

computerisation and deployment issues.”

While the banks managed to achieve two major VRS objectives —

removing surplus (including non-performers) and reducing

employee costs — a second objective was still to be met. VRS was

87


supposed to level the age profile. However, the results were not

different from before with 16 per cent below 35 years of age, a

sizeable 45 per cent between 35 and 44 years and 39 per cent

between 45 and 60 years. Roughly 75 per cent of the officers who

opted for VRS were in the 40 to 55 age bracket.

Further, SBI chose not to abide by government guidelines and

offered VRS only to employees above the age of 55. According to

government guidelines, any employee who was above 40 and had

completed 15 years of service was eligible for VRS. But SBI

marked its own cut-off age: it offered VRS to only those

employees who were over 55. This created a furore among

employees below 55 years who also wanted to opt for VRS.

Besides, the VRS could have balanced the skill profile vis-à-vis the

employee mix (officer:clerical:subordinate), which was earlier

27.6 per cent:50.22 per cent:22.2 per cent in public sector banks.

Post-VRS, according to the IBA bulletin, the ratio changed to 25.4:

51.0: 23.6, which means that along with clerical staff, the

proportion of officers has gone down by 2.2 per cent.

The government has now disallowed new staff recruitment,

forcing banks to retrain the remaining staff to handle new duties

at the shortest possible notice. Some banks resorted to promoting

88


clerks to officer cadre. Andhra Bank, for example, promoted 1,200

clerks to officers with a 20-plus per cent pay hike.

The impact of manpower shortage would have been less if the

banks’ functions had been automated or computerised. However,

reducing employee strength before technology arrived only led to

chaos. The IBA says that in the fiscal 1999-2000, the Central

Business Commission had summoned all banks to be 70 per cent

computerised. Accordingly, most public sector banks started to

work on the target around the time VRS was being implemented.

But an SBI HR executive says that the decision was taken too

swiftly to enable proper communication to employees. In

complete contrast, Corporation Bank refused to exercise VRS at

that point and was actually hiring 200-odd new employees for

specialised services like technology, marketing and so on.

However, the bank then considered the VRS option for about 160

officers above 50 years of age.

An additional — and major — problem was dealing with

those who were eligible for VRS and whose applications

were rejected. In SBI, for instance, only 21,329 employees’

applications for VRS got approved out of the total of 35,380

applications, leaving about 11,000 dejected.

This lot formed an association — SBIVRS Optee Officers’

89


Association — to articulate their case and request the government

to reconsider applications. The association also maintained that

the SBI management “abysmally lacked the human touch in its

manpower planning and this resulted in indelible functioning

among its officers.” Eleven cases have been filed by these

employees against the bank. Says the HR executives at SBI, “It

will take some time to soothe the heartburn but through constant

communication the employees that were refused VRS, are being

convinced that they were needed and hence were not granted

VRS.”

There were other problems, Says an officer with Punjab & Sind

Bank: “The VRS was conducted in a very arbitrary manner. For

instance, VRS was on the verge of becoming Compulsory

Retirement Service (CRS). A particular employee in a Mumbai

branch, for instance, wanted to withdraw her application but was

refused by the management and was forced to leave.”

Also, ironically, the financial package didn’t appeal to optees who

opted for the lumpsum payment mode. Though the VRS amount

was as high as Rs 8 lakh to Rs10 lakh per employee, most

employees were willing to prefer a monthly pension scheme.

Says Khanna of BanknetIndia: “Usually in public sector banks, the

management has an interface with the employees, offering them

90


a counselling-cum-discussion session. But in this case, since a

huge number of employees were in the process of exit, this

procedure was skipped.”

Echoes Ganesh Shermon, senior partner, Strategy Organisation

and People, Andersen Business Consulting (soon to be KPMG

Consulting), “Banks clinically reduced the headcount. Counselling

and out-placement were the issues that were conveniently

forgotten by the banks pre- and post- VRS. And worse still, a

badly-planned VRS depletes the shareholder value.”

According to Shermon, there were fundamental fallacies in the

way banks carried out the VRS. A good VRS, according to him,

should be demographically aligned, based on age and

competency profile of the employees, should have a clear-cut

manpower plan and should be driven by keeping in mind future

strategies of the business. “These were missing in the VRS

implementation among public sector banks,” says Shermon.

Says HRD consultant J B Kabra of Mind Movers Management

Consultants, “To nullify the psychological impact on employees’

lives, banks could have provided them with alternative means of

employment. The optees could have been employed alternatively

in the co-operative sector banks, who constantly need staff who

can work in shifts.”

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

TO SUGGEST!!!!!!!!!!!!

f the VRS had landed the banks in a situation where the

remaining staff was found inadequate to carry on with the

various functions of these banks, it was necessary to

implement the other ingredients of the VRS package. The public

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sector banks in India have had the unenviable task of completing

a round of voluntary retirement of its employees. Most of the

bank customers may not be aware of the impact of the VRS

(voluntary retirement scheme) on the banks' ability to continue

the tempo of customer service. The customers were often found

complaining about the service provided to them, but has any of

us, being the customer ever thought the reason behind it. We as

customers would newer have experienced too many employees in

a bank, but incase of lack of service, have we ever thought about

the reason behind it or has the bank management ever thought

the exact reason, whether the service provided was better then or

now. The only problem was staff management and increased cost.

Now should these be solved at the cost of poor customer service?

The correct answer to this is the mechanization and the

computerization that took place in the banking industry two

decades ago, and also the wayside ATMs (automatic teller

machines) we see today may loudly announces their ability to

provide ample service to the community. But, the fact is

otherwise. May be, the service to customers is not hindered so

far.

When the VRS was in the process of implementation, all staff

unions and even some banks opposed it on various grounds. The

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unions opposed it as they never agreed with the view that public

sector banks have had excess flab. This was the view the union

leaders held when restrictions on recruitment was enforced by the

Government. Such being the case, much reliance may not be

placed on this. But, what made some bank managements to come

out with statements such as "we do not have excess staff to

shed", "we want to have a different scheme in our bank" and the

like? Was there a great deal of coercion from various quarters

leading to the implementation of the VRS uniformly in all public

sector banks.

If the banks ever ask me the alternatives or solutions to VRS, I

would tell them…

Weed out uneconomic branches, either by closure where

alternative banking services are available to the public or

merge them with nearby branches. It is also worth considering

the feasibility of taking over such branches by other group

banks like fully government owned banks, State Bank group

banks and the like.

Expedite the promotion process in all banks from clerical

cadre to officers' cadre which was one of the means suggested

to meet the shortfall in the officer staff when the VRS was

mooted

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Pursue vigorously the computerisation process in all banks,

Initiate motivational policies and lay down career paths to staff

Review training plans at all levels and workout short term

strategies

Implement the alternative recruitment machinery to the

abolished Banking Service Recruitment Boards (BSRBs) in

individual banks

Streamline and rationalise the systems and procedures in

the banks to meet the changing needs and expedite the

process of privatisation already under way.

The list may be endless. What is required is the will, and

prompt action. The focus is on customer service without

adversely affecting the back office function. The health of

the banking system should be improved without any letup in the

standard of efficiency expected of a vital link in the liberalisation

process which is to be furthered in the road map for achieving

global standards.

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Leapfrogging from one policy to another without

adequately strengthening the linkages can lead to

catastrophic results.

Thus if VRS was employed but proved to be a failure,

implementation of another policy correcting its consequences is

not viable. Instead the VRS should be revised and all the

loopholes should be looked into at a national level, then only a

common solution to the problems of many such banks can be

solved.

In an ever- growing sector like banking in India, which is still

facing the problem of non-performing assets, hasty

implementation of substantive policies will make matters worse.

The banking sector has unfortunately been the target of such

instances for the last 32 years!

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After a thorough research it can be concluded that If the VRS has

landed the banks in a situation where the remaining staff is found

inadequate to carry on with the various functions of these banks -

both internal and to the clientele - it is necessary to implement

the other ingredients of the VRS package such as redeployment,

accelerated mechanisation and computerisation, selected

recruitment of specialised staff and closure of or merger of

uneconomic branches. From the published results of some of the

banks, it has been seen that the VRS outgo has substantially

reduced the declared profits and it remains to be seen whether

the bottom-line of all the banks has withstood the weight of this

expenditure.

Well, what has been done cannot be undone. At least now it

is imperative to take stock of the actual state of affairs and

initiate corrective measures before it is too late. Some of the

urgent needs are: Identification of deficit manpower in each bank.

Redeployment on the basis of all India norms, instead of leaving

the matter to the local or bank level management. This will be a

rational approach as the VRS norms were also on national level.

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n order to find out the present thinking of the bank employees, I conducted a survey by distributing questionnaire to bank employees from NEW INDIA CO-OPERATIVE BANK, DENA BANK

& BANK OF INDIA. The survey size is 30 i.e. 10 employees each bank.

IThe questionnaire for the employees is as under-

ROYAL COLLEGE OF ARTS, SCIENCE AND COMMERCE

A QUESTIONNAIRE FOR BANK EMLOYEES RELATING TO VOLUNTARY RETIREMENT SCHEME

BANK:AGE: SEX:QUALIFICATION:DESIGNATION:NO. OF YEARS SERVICE PROVIDED:

1. YOUR MONTHLY SALARY RANGES BETWEEN..

BELOW 10,000 10,000 TO 20,000 ABOVE 20,000

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

3. A BETTER OPTION FOR YOU… VRS CONTINUING THE JOB

4. YOUR EXPECTED AMOUNT FOR VRS_______________________

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

FINDINGS

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For a clear understanding of the collected and its systematic representation the use of charts and diagrams will be done in order to analyse the data.

Moving on with the question whether the bank employees will accept or reject it, the following results were found…..

The blue bar represents the percentage of employees who would accept the VRS offer and the red bar represents those who would reject it.

Now, the blue bar mostly comprised of the people between the age group of 45 – 50 years.The amount that they expected to receive ranged between Rs 2000000 to Rs 25000000.

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The employees who would accept the offer were asked as to

where they would invest their amount. Their replies are

represented in the form of a bar diagram.

It can be clearly seen that the maximum employees would keep

their saving for their old age thus securing their future, and

the least of them would apply it in setting up a new

business. While some would invest it in equal proportions

between old age savings, setting up a new business and for their

children.

Thus, it can be concluded saying that if given an option, not many

would opt for VRS and that the optees would be people nearing

their retiring age and would utilize their amount for their old age

saving

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www.hinduonnet.com

www.thehindubusinessline.com

www.hindu.com

www.merinews.com

www.icmrindia.com

www.planningcommission.nic.in

www.banknetindia.com

DATA COLLECTIONFrom the employees of –

DENA BANK, MIRAROAD BRANCH

BANK OF INDIA, MIRAROAD BRANCH

NEW INDIA CO-OPERATIVE BANK

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http://www.banknetindia.com/

http://www.planningcommission.nic.in/

http://www.icmrindia.com/

http://www.merinews.com/

http://www.hindu.com/

http://www.thehindubusinessline.com/

http://www.hinduonnet.com/


FACTS ARE ENDLESS!!!!!!!!!!!

This is what I believe.

And thus, I would like to make a mention that this is not the end

on the facts of VRS. There is much more to it. I have tried my

level best to understand various factors and present it in the best

possible manner.

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VRS IN PUBLIC SECTOR BANKS

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