Band-aid solution

Avoid linking bank employee benefits to recapitalisation

On paper, the finance ministry’s letter to 10 weak state-run banks linking recapitalisation to a cut in staff increments and benefits appears logical. The big questions, as always, hinge on the willingness of the powerful bank unions to acquiesce to such cutbacks and, if they do, whether such measures will make a material difference to the efficiency of banks. These banks, which have collectively requested a capital infusion of Rs 8,586 crore, tend to be among the most overstaffed as well as the least efficient. In the financial year 2015-16 and the first nine months of 2016-17, seven of these banks reported losses. The losses, when compounded by the cost-to-income ratio for all state-owned banks hitting a decade-high in 2015-16, make the government’s demand unexceptionable. The proposal calls for an agreement among managements, employees and unions for a moratorium on standard industry pay increases, leave travel concessions and other perks, and linking capital allocation to quarterly milestones.

These cutbacks, which are in line with a government statement that it will recapitalise 13 of the 19 banks it owns based on performance, could be reversed if the banks manage a turnaround. Given that four of the seven loss-makers appear to be on course to reduce their losses on an annualised basis and two are back in the black, this should not be such a tall ask. A precedent of sorts exists from about 30 years ago when three banks on this list — Indian Overseas Bank, United Bank of India and Indian Bank — had signed agreements with their unions to curtail employee benefits. This worked inasmuch as the banks bounced back in three years.

Today, however, the sharp political polarisation between the Left parties, which have traditionally dominated the unions, and the right-wing government at the Centre may make such agreements difficult to conclude — demands for pay parity with central government employees suggest a new feisty-ness among union leaders. Further, the growing problem of bad debts, which burden these banks as much as any other, make the possibility of a quick turnaround distinctly weak. The bigger question, perhaps, is whether this prescription will effect lasting change. The PJ Nayak committee’s recommendation that public sector banks be privatised cannot be applied to these banks because they boast few assets worth acquiring. Nor can they be described as dynamic institutions by any definition of the term.

Visits to most of these banks reinforce the impression of an all-round, irreversible decay. From the rundown décor to the obvious manifestations of rock-bottom employee morale, all of them qualify for Percy Mistry’s descriptor of “zombie banks”; in any other reasonably efficient economy they would have been closed. In an environment in which the government is no longer the sole source of capital for the economy, political pressure rather than commercial dictates keeps these banks going. In that respect, a performance-linked recapitalisation, though sensible, is a band-aid solution at best. With its political capital at an all-time high, the government would have done better to have bitten the bullet and moved these banks towards closure. Paying salaries and dues to residual employees must surely be more cost-effective than keeping these banks on life support.