As I walked into Bank of India's south Mumbai branch at Express Towers, its reception wore an empty look. The receptionist was conspicuous by her absence. I later learnt that the lady at the reception had opted for the voluntary retirement scheme (VRS) introduced by the bank and the vacancy so created had not been filled!
About a month back a friend desperately pleaded with me for a small loan since his banker had not yet credited the proceeds of his salary cheque into his account. Reason? A work-to-rule agitation by the employees at one of the State Bank of India branches, where he had an account. This agitation had been brought about by employees who were forced to work more as a result of the vacancies created by those opting for the VRS remaining unfilled.
These are some of the examples of the kind of impact VRS is having on corporate India -- transforming a situation of over staffing in the pre-VRS era to a scenario of under staffing in the post-VRS era, yet helping organisations in their cost management exercises.
These incidents also indicate the change engulfing the "mindset" of decision makers in corporate India. In fact, implementing VRS has become like a 100 metres race. From private sector companies to public sector undertakings, each one is trying to beat the other in the race for initiating and implementing a VRS. And, this is a race in which some of the best-known names are participating. Reliance Industries, Rhone Poulenc, Sail, Tisco…these only form the tip of the iceberg.
The reason for this rush is very simple - to cut costs and remain competitive in a scenario where barriers are falling like ninepins and boundaries are breaking down. With globalisation fast becoming a reality and the world beginning to look like one single seamless market, survival of the fittest has become a fact of life.
Indian companies now compete with cheaper products coming through imports. Suddenly reality has dawned upon them that to survive, cost management will become an imperative. Naturally, bloated wage bills got the first axe.
Improving productivity through VRS
Tata Steel was the first company in the Indian steel industry, which offered ESS or an early separation scheme to its employees way back in 1996. Over a period of time through successive VRS, Tata Steel managed to reduce its labour force by almost one third, in the process managing to improve its productivity by almost 75 per cent. Its employee cost, as a percentage of total product cost, has currently fallen to 10 per cent from 10.7 per cent in the past. The impact of all this can be seen in its profitability. Since the reduction in work force, the company's bottom line has been growing spectacularly to the delight of financial analysts.
Public sector banks implementing VRS!
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 have lagged far behind the new private sector in profitability. Their flab shows in their bottom lines.
Banks having implemented, or in the process of implementing, VRS are 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 domain-b 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 have opted for VRS. In a special arrangement with their employees, the PNB management has 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 have availed of the VRS scheme. While 7,400 had already been relieved, the case of balance 366 was yet to be decided on disciplinary grounds.
India's largest bank, State Bank of India, has also implemented VRS and about 21,000 employees out of a total of 233,000 have opted for the scheme in fiscal 2001, according to SBI sources.
Implementation of VRS also helps improve efficiency. RM Nayak, general manager, credit & international banking, Bank of Maharashtra told domain-b, "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 will incur/are incurring huge capital costs and cash outflows during the ongoing VRS scheme, they will simultaneously save a lot of recurring costs and cash outflows which will positively affect their profits and improve profitability in the years to come.
In the case of the State Bank, an analyst with Kotak Mahindra Securities estimates that the bank could end up posting a net profit of Rs 24.6 billion in fiscal 2002 as against Rs 16.8 billion in fiscal 2001! Speaking to domain-b, Paresh Kothari, an analyst on the banking sector with Khandwala Securities said, "Impact of VRS has already been discounted and factored in the current stock prices by the market but in the long run the overall impact on the share prices will be very positive." He said costs will come down and profits will go up, both bullish factors for stock markets.
Clearly, cost cutting is set to have its impact on banks' profits as well as profitability and it is only a matter of time before the frenzy for bank shares returns to the stock markets.
While working women have been the happiest with the sudden rush in VRS since they can now spend quality time at home, there is a debate as to whether there arises a social risk of employees availing of VRS going astray with their money? Employees are lapping up VRS, seizing a lifetime opportunity of laying their hands to sizeable amount of cash, which can be used to fulfil their professional/personal needs/ambitions.
Most managements, however, do not think so. 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 domain-b, 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 has launched a project whereby he is trying to help those who have availed VRS to find alternate employment opportunities. He has used his association with the insurance, bank and the IT sectors to help such employees alternative employment. He also provides adequate training to the employees in new areas where required, with the help of psychologists who correctly analyse and assess the aptitude of such persons.
He says that around 1.25- 1.5 lakh job opportunities will crop up in areas like insurance, direct marketing and broking through BOLT terminals and VRS employees could be placed in any of the above. He says, "I want to exploit the knowledge capital, which is hidden in all VRS employees. I want them to work and thus prevent them from remaining idle. Otherwise, they will be mentally dead."
Unions and VRS
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.
This is just the beginning. PSU banks will have to implement at least another round of VRS before they reach a respectable level of employee productivity.