Why the bank VRS worked - or did it?

THEME/BANK VRS

It was declared a huge success. Quite right, too, considering what happened last year: over one lakh bank employees sent home with a golden handshake; workforce downsized by 11 per cent at one go; Rs 2,000 crore annual wage savings in future from the downsizing; unions left embarrassed by the extreme willingness of staff to take their money and run.

L.K. Singhania, for 32 years an employee of Bank of Baroda, was one them. He became a rupee millionaire twice over and collected Rs 22.5 lakh as booty "" Rs 12.5 lakh as VRS handshake and the rest as his statutory dues. For years Singhania had to be content counting other people's money; today he is counting his own with obvious satisfaction.

With one lakh other millionaires keeping him company, it would seem like a win-win for everybody. The banks were happy to wave goodbye; the employees were equally happy to wave back. A happy ending?

Not quite. Behind the overwhelming response of banking staff to the VRS programme is an underwhelming reality. The stampede to the exits left several bank branches undermanned and poorly attended for several weeks. The SBI, which lost close to 23,000 employees, spent the summer months of 2001 trying to pacify irate customers left standing at staffless counters, and pleading for patience with fellow banks "" who found cheque clearances slowing down at the SBI end, costing them money.

The wage savings may happen in the future, but in the short term VRS helped tip some banks deeper into the red (Dena Bank among them). Back home, the employees denied VRS were to receive rude shocks as managements asked them to shoulder the burden of departed colleagues. Several customer-friendly moves "" Sunday banking, and extended banking hours "" were quickly shelved or delayed as unions clamoured for more recruitments at understaffed centres.

Some bankers have even questioned whether they saved any money at all. Uco Bank chairman V.P. Shetty was quoted by a newspaper last year as saying that his wage bill as a percentage of total cost has gone up after the VRS and will continue to do so. "VRS has added to the cost instead of bringing it down." The villain of the piece: unplanned VRS.

Shetty would have preferred localised, bank-specific VRS schemes that would have confined the targeting to surplus areas and not the whole bank. Left to himself, he would have offered handshakes only in areas of surplus, segregated by language, region, state, city or even branch. But that was not to be, and the VRS programme at public sector banks was a one-cap-fits-all strategy.

The only bank that refused to wear the cap was Corporation Bank "" and it is paying a different kind of price: discontent among its own staff for leaving them out of the treasure hunt. When last heard of, Corporation Bank employees were agitating for a share of the loot, and threatening a strike.

The total cost? As on March 31, 2001, the public sector banking industry had incurred around Rs 12,000 crore on VRS (including ex-gratia, other statutory expenses like LTA, medical, leave encashment, etc.) But the real price will be paid in the years to come because the bank VRS did not succeed in targeting the largesse correctly. If technology induction and efficiency was the raison d'etre for this massive exit scheme, then it is the clerical and sub-staff who should have been targeted. But the numbers show that banks were most successful with the officer cadre "" whose experience they need to modernise and upgrade service "" and least with the rest.

The numbers speak for themselves: of the one lakh and odd people who were offered VRS, as on June 30, 2001, over 40 per cent (43,144) were officers. Clerks and sub-staff accounted for the rest.

Not that the entire exercise was a flop. But clearly, it could have been orchestrated better. So what went right and what wrong? And why did it work so well in getting people to leave?

Says Ganesh Shermon, Partner (Strategy, Organisation and People) at Andersen's Business Consulting division: "There was money at hand, the market for bank officers had grown, and many felt that it would be better to leave than stay with uncertainty (over lowering of retirement age, etc)." Many of the VRS takers were also women, for whom the ability to devote time to family would have been an added attraction.

LOSS OF INTELLECTUAL CAPITAL

But Shermon also underlines the exodus of officers as a problem. "It amounts to a huge loss of intellectual capital," he says, pointing out that many managers in the sub-50 age brackets would have headed for the new-generation private banks who were still recruiting big for their aggressive branch expansion plans.

A survey by the All India Bank Officers' Confederation (Aiboc) seems to confirm this hunch. Roughly a quarter (24.28 per cent) of the VRS takers was in the 40-50 age group "" just the kind of group that would be both rich in experience and adaptability. The bulk (49.45 per cent) were in the 51-55 age group and 26.37 per cent were in the 55-plus category. It is only the last group "" the ones headed for the rocking chair "" that should have been targeted aggressively.

The Aiboc survey, conducted soon after the VRS, also throws interesting sidelights on the reasons why so many officers marched out. Many of them said they didn't like the routine transfers policy, where bank officials are transferred every three to five years. The other reasons cited were fears about the possible rollback of the retirement age to 58 from 60, the lack of satisfactory working conditions, and the attractive VRS package. Two of the three reasons suggest that many of the people who left would have done so for continuing careers.

One the other hand, it's not as though all VRS takers are sitting pretty. Rupee millionaires they may be, but with invested rupees earning lower interest rates, they have to think of some kind of a return to work sooner or later. Singhania, the 55-year-old Bank of Baroda clerk mentioned earlier, has scratched earlier plans to sit at home and sip tea every hour. With a monthly pension of Rs 7,200, he thought he was in clover. But now he is not so sure. He is looking out for a part-time job.

His former employer is, meanwhile, mulling options on another round of VRS. Bank of Baroda is closely looking into the recommendations of its infotech consultant Gartner, which has made a case for introducing a second round of VRS aimed at slashing twice as many jobs as the last time: 15,000 employees vs. 7,000 plus the last time.

Presumably, BoB and other banks will handle it better the next time. Last year, as thousands packed their bags at the SBI, the bank even had to acknowledge its problems in public. "Please bear with us due to problems caused by VRS (voluntary retirement scheme)," said a candid notice in one of SBI's Mumbai branches.

The bank's top management now feels that it should have phased the VRS programme. Instead, one fine morning on March 31, 2001, several thousand of its employees walked out of the premises never to return. And it had problems managing the show a month down the line when statutory audits began to happen. The guys who knew all about it were not around to make the numbers add up.

How the foreign banks do it

Retrenchment, downsizing and rightsizing are old hat for India's legion of foreign banks. Most of them have been doing it for years for one of several reasons "" mergers, demographics, or restructuring. Citibank has done VRS in the past when it found that its older managers were stagnating in their careers and the younger managers had no way to rise up the hierarchy. Offering VRS to the older lot is thus a good way to ease people blocking the top slots while also lowering the cost structure. These kinds of exits typically offer payback in two years or less from the savings

But global and domestic restructuring are usually the bigger reasons for downsizing in India. The most recent case is BNP Paribas, which cut the flab by 80 while closing its retail business in India. Both the heads of retail banking and distribution were asked to go.

Other foreign banks have been periodically introducing VRS and getting rid of extra flab on a very modest scale. But it was Standard Chartered Bank, which last year took over ANZ Grindlays in India, that launched the largest ever VRS by any foreign bank in India. It introduced a series of three voluntary retirement schemes (VRS) in quick succession during the year to cut flab.

However, unlike Indian banks, the foreign banks tend to both substract and add. Standard Chartered, for example, continues to add new employees for its global processing centre at Chennai. It is planning to employ around 1,400 people at the processing centre. Clearly, these banks do not see VRS as a one-time, static process. It is a part of their constant efforts to grow-and-shrink, depending on which way the business is evolving.

The public sector banks are now dusting up their old technology plans "" where they existed "" and hiring consultants by the dozen to draw up one for them "" where they didn't. The SBI is giving final touches to its technology plan. It is also installing ATMs aggressively and computerising branches.

For the unions, the bank VRS has been a disaster. Not only has their membership clout declined, but the decision of bank employees to vote with their feet suggests that when money is at stake, union solidarity will be a casualty.

Around early 2001, two Kolkata-based trade union leaders found that workers refused to follow them when it came to golden handshakes. At the Indian Bank Employees Association (Aibea) office on Calcutta's Lalbazar Street, Tarakeswar Chakraborti, the organisation's general secretary, was found fuming impotently last year when he was unable to stop the bank VRS.

A few hundred yards down the lane, on the fourth floor of Bank of India's zonal office, Shanti Ranjan Sengupta, leader of Aiboc, the largest officers' organisation, faced similar embarrassment when thousands of bank officers desperately lobbied the management to accept their VRS applications last year.

From the point of view of long-term bank needs, the VRS could have been handled better, but for a government that was determined to cut numbers, it was a feather in the cap. Right from the outset, the government had played its cards smartly. The unions were stymied since the finance ministry did not claim authorship of the VRS scheme. It merely gave the go-ahead to the proposal and left it to individual banks to decide whether they wanted to cut flab or not.

There was no government notification on 'retrenchment' to spark off a fierce political debate or provoke union calls for nationwide strikes. Instead there were small agitations in different pockets and the unions lost the battle miserably. The scale of the defeat became clear on March 31 last year when the VRS schemes went into action. As 23,000 State Bank of India employees marched out of around 9,000 branches across the country there were protests because the management had refused to release another 35,000 employees who had applied for the scheme.

DEFEAT FOR UNIONS

The response was overwhelming and it turned into a nightmare for the top managements of the banks that had to handle the mad rush for VRS. "It was a spontaneous move. There was no target set up by any bank and hence the question of putting pressure does not arise. There was phenomenal response and some of the banks could not accommodate all the applicants," the Indian Banks' Association's chief executive officer KC Chowdhury had said at that time.

Aiboc general secretary SR Sengupta cried foul: "There was unfair propaganda and threats in the run-up to the launch of VRS. An HRD panel appointed by the government even recommended a rollback of the retirement age for officers from 60 to 58. That created a fear-psychosis among the officers who preferred to call it a day instead of losing two years of service." Admitting that the unions failed to counter the VRS rush, Sengupta is honest enough to say that the package offered was possibly the best in the public sector.

Under the scheme bank employees over 45 years of age were offered two months' salary for every year of completed service or residual service, whichever was lower. This compared favourably with the established norm of 45 days' salary for every year completed.

The exuberant response from employees caught management unawares, suggesting that many of them didn't do their homework. SBI chairman Janki Ballabh says that the bank had indeed done its its homework and that is why even though over 19,000 officers wanted to accept the VRS, it was offered to only 7,500. But most of the other banks were caught napping, and were forced to stop many key officers in departments like treasury from leaving. This created heartburn.

Did the public sector banks offer excessive bait? Bank of India Chairman K.V. Krishnamurthy says there was an urgent need to cut costs: "Staff costs in the state-run banking industry are abnormally high. As a percentage of the total cost, staff cost in the public sector banks accounts for 60 to 75 per cent against the global standard of 30 per cent. The productivity is low. There is not enough work for everybody."

CUTTING STAFF COSTS

Krishnamurthy had, in fact, acted even earlier to stem the rot. He was the first chairman of a state-run bank to take on the unions and introduced a sabbatical scheme "" a variant of VRS "" in 1998-99. At Syndicate Bank, Krishnamurthy allowed employees to take three years' leave without pay "" no questions asked. The aim was to cut staff costs and it worked brilliantly. Two years later, when the Indian Banks' Association (IBA)-constituted S. S. Kohli panel came out with guidelines for VRS in the public sector banking industry, sabbaticals had become an accepted part of the gameplan.

The State Bank of India is spending a staggering Rs 800 crore to build an advanced technology platform. The game plan is clear: once the technology platform is in place, the dependence on manpower will fall dramatically. The bank is racing ahead with its plan to install 1,000 ATMs across the country. It also plans to connect 2,700 branches.

IBA's Chowdhury says technology will slowly replace manpower in the state-run banking industry. "In March 2001, 71 per cent of the banks' business had been computerised. In fact, 22 out of 27 public sector bank have computerised over 70 per cent of their business. Only five banks are below the 70 per cent mark. There is no readymade formula which can tackle the manpower problem overnight. But the banks have been sincerely addressing the issue," says the CEO of IBA.

One that got away

Corporation Bank was the ugly duckling among swans last year. It was the only public sector bank to resist the pressure to cut flab through VRS since it felt that it was short of officers. It also didn't want to participate in a VRS that was so loosely targeted.

But after being left out of the 2001 party, Corporation Bank employees want their piece of cake. If they get it, once again it would demonstrate the power of pressure over reason in public sector VRS issues. The bank's management has appointed a committee of executives to look into the unions' VRS demand. The committee "" which is assessing the manpower requirements of the bank "" is likely to submit its report to the board of the bank in May.

Corporation Bank has an employee strength of close to 11,000. It also has a comparatively young workforce with 76.73 per cent (8,315) belonging to the age group of 45 or less. The managment has been resisting the demand for VRS as it feels it needs an even bigger workforce to support its expansion plans. In fact, the bank is in the process of recruiting around 600 officers and clerks over the next few months. Industry sources, however, indicated that the bank managment would now be open for a VRS "" with some riders.

But despite the hiccups, the VRS is hailed as a landmark both for its boldness and the future benefits it may bring. Employees are being re-trained post-haste and re-oriented. Promotion will come at a faster pace. Bank of India's Krishnamurthy has halved the strength of the chairman's secretariat and sent the employees to the branches. The State Bank has also appointed the National Institute of Bank Management (NIBM) to work out the best staffing patterns.

NEGATIVE SIGNS

But the signs are not all positive. At Central Bank of India and Corporation Bank, thousands of employees who missed the bus are clamouring for another round of VRS. In the State Bank of India, another 23,000-odd employees are ready to grab the cash and run if the management makes the offer a second time. Some bank chairmen are already suggesting that voluntary retirement schemes should be an annual feature and a sizeable portion of the staff have welcomed the idea. Perhaps VRS is the way forward if the public sector banks are to convert themselves into lean and mean money-making machines. But the lessons of the VRS of 2001 will have to be learnt.

Long after the managements have finished patting themselves on the back for reducing their numbers, they will be left with a nagging question: Why are so many of their best and brightest clamouring to leave?

(This article was published in the April 2002 issue of Indian Management)