EMPLOYEE DOWNSIZING:
IMPLICATIONS OF VRS ON PUBLIC
SECTOR BANKS IN
INDIA
Minor Research Project Report
Submitted to the:
University Grants Commission Western Regional Office
Ganeshkind, Pune
By;
Dr. K. G. Sankaranarayanan Professor (on lien)
Narayan Zantye College of Commerce
Bicholim, Goa
2021
DECLARATION
I, Dr. K. G. Sankaranarayanan, do hereby declare that this Project Report
titled “Employee Downsizing: Implications of VRS on Public Sector
Banks in India” is a record of original research work done by me at Narayan
Zantye College of Commerce, affiliated to Goa University.
I also declare that this Project Report or any part thereof has not been
previously submitted by me for the award of any Degree, Diploma, Title
or Recognition in Goa University, UGC or elsewhere.
Dr. K. G. Sankaranarayanan
Place : Bicholim
Date : 13th March 2021
ACKNOWLEDGEMENT
I am deeply indebted to my colleagues at Narayan Zantye College of
Commerce, Bicholim Goa, for their inspiring guidance, valuable
suggestions and constant encouragement, without which it wouldn’t have
been possible to complete this project work.
I extent my sincere thanks to the non-teaching staff of Narayan Zantye
College of commerce for extending their whole hearted support and
cooperation. I sincerely thank Dr. Nandakumar Mekoth for giving his
valuable suggestions. I am also thankful to the Management of Narayan
Zantye College for permitting me to carry out this project.
Dr. K. G. Sankaranarayanan
TABLE OF CONTENTS
Chapter
No. Description
Pg.
No.
Declaration i
Acknowledgement ii
Table of Contents iii
List of Tables iv
Chapter 1 Introduction 01-09
1.1 Origin and growth of the problem 02
1.2 Research Problem 05
1.3 Significance of the study 06
1.4 Objectives of the study 07
1.5 Hypotheses 08
1.6 Scope of the study 08
1.7 Research Methodology 08
1.7.1 Sample design 09
1.7.2 Data Analysis 09
1.8 Presentation of the study 09
Chapter 2 Literature Review 10-20
Chapter 3 Analysis of Pre and Post VRS Performance
of the Banks 21-36
3.1 Employees’ Productivity 21
3.2 Employee Cost Ratios 26
3.3 Profitability of Public Sector Banks before and
after the VRS 29
Chapter 4 Conclusions and Suggestions 37-40
4.1 Theoretical Contributions 39
4.2 Managerial Implications 39
4.3 Limitations of the study 40
References
LIST OF TABLES
Table
No. Title of the table
Pg.
No
3.1 Employee Productivity Ratios 22
3.2 t-Test: Profit Employee after and before VRS 24
3.3 t-Test: Business Employee after and before VRS 24
3.4 Employee Cost Ratios 26
3.5 t-Test: Employee Cost to Operating expenses 27
3.6 t-Test: Employee Cost to Total Business 28
3.7 t-Test: Employee Cost to Total Assets 28
3.8 Profitability and its related factors of Public Sector Banks (Pre-
VRS period) 30
3.9 Profitability and its related factors of Public Sector Banks
(Post-VRS period) 32
3.10 t-Test: Liquid Assets to Total Assets 34
3.11 t-Test: Current Ratio 34
3.12 t-Test: Capital Adequacy Ratio 35
3.13 t-Test: Return on Assets 35
1
Chapter-1
INTRODUCTION
Employee downsizing is a nightmare feared by most of the
employees working in the corporate world. In management parlance, the
term downsizing refers to pruning (including layoffs and retrenchments) of
the size of workforce for a variety of reasons: Obsolescence of skills
consequent upon upgradation of technology, shift in the organizational
requirements; outsourcing; modernizing, restructuring or even reducing the
activities of industrial units; and redesigning the job in an organization.
The fundamental reason to resize the organization is to improve
organizational performance and to reduce costs of operation. While these
changes are expected to fetch significant gains for the companies in the
long run, an analysis of corporate experiences of downsizing shows that
such measures are not always implemented with careful consideration of
all the implications. Downsizing also brings, in its wake, a number of
associated hidden costs, which companies tend to overlook in pursuit of
short-term gains. The flip side of downsizing is that the organizations lose
expertise, skills, knowledge, experience and valuable relationships, which
walk out of the door every time somebody leaves. A number of alternative
approaches can be implemented to achieve the over-riding goal of
enhancing business performance. At the same time, it is true that
downsizing in many cases is an inevitable option.
2
Restructuring of enterprises was prevalent in the past also but that
got a momentum only after the Central Govt. released the much awaited
New Industrial Policy on 24th July, 1991. The Govt. follows it up by
bringing about an amendment to the Income Tax Act under Section 10(10c)
read with rule 2BA wherein VRS within specified guidelines can be
approved by the Income Tax Department so that the beneficiary employees
will not be taxed for the compensation they receive from their employer on
Voluntary Retirement.
1.1 Origin and Growth of the problem
The demands of the emerging competitive market put such a premium
on organizational productivity that if it is not able to keep pace with the
constantly raising employees cost and profitability requirements, indeed,
its survival stands seriously threatened. Keeping in mind the above view,
VRS in Banks was formally taken up by the Government in November
1999. According to Finance Ministry on the basis of business per
employee (BPE) of Rs. 100 lakhs, there were 59,338 excess employees in
12 nationalised banks, while based on a BPE of Rs. 125 lakhs the number
shot up to 1,77,405. It was estimated that the public sector banking system
was overstaffed by roughly 100000 people. Finally Government cleared a
uniform Voluntary Retirement Scheme (VRS) for the banking sector,
giving public sector banks a seven-month time-frame. The scheme
remained open till March 31, 2001.
As per the scheme all permanent employees with 15 years of service
or 40 years of age will be eligible to avail of it with ex-gratia amounting to
3
60 days salary. Employees eligible for VRS, but who do not want to avail
themselves of the scheme, have been provided with the option of choosing
to go on a sabbatical for 5 years. While the right of refusal to give
voluntary retirement has been granted to the bank management,
recruitment against vacancies arising through the VRS route has been
disallowed.
The result of the VRS implemented in public sector banks between
15th November, 2000 and 31st March, 2001 is the exit of 11.7 percent of the
total workforce ie, out of the total 8,63,117 employees in 26 public sector
banks (excluding Corporation Bank), around 1,00,810 employees opted
VRS. The number opted from State Bank of India came to 20,784, of
which 6,694 were officers, 11,271 clerical staffs and 2,819 subordinates.
The cost of VRS to the bank was Rs. 2,000 crore-plus. In Vysya Bank the
percentage of employees opted VRS was twice than the expected 10
percent. According to HR officials at Dena Bank, it lost around 3,842
employees due to VRS (or roughly 25 percent of its total manpower) . As
per a report compiled by ICRA, the combined net profits of the 27 PSU
banks increased by 48 percent to Rs. 12,294 crore in the last fiscal. Net
NPAs fell drastically from 5.8 to 4.5 percent. The net profits had increased
by 92.5 percent in 2001-02. Thus the net profit of PSU banks increased
2.8 times during the last two financial years. Of the total State Bank of
India and its associates contributed Rs. 4,510 crore or 36.7 percent of the
pie, while the share of 19 nationalised banks was a 73.3 percent at Rs. 7,784
crore. SBI topped the list posting a net profit of Rs. 3,105 crore. SBI was
followed by Canara Bank with a net profit of Rs. 1,019 crore, Bank of India
4
(Rs. 851 crore), Punjab National Bank (Rs. 842 crore) and Bank of Baroda
(Rs. 773 crore). Net NPAs fell drastically from 5.8 to 4.5 per cent. Gross
NPAs came down to less than 10 percent from 11.1 percent. The PSU
banks were able to reduce their Gross NPAs to 9.2 percent while Net NPAs
came down to 4.5 percent. Besides, the VRS could have balanced the skill
profile vis-à-vis the employee mix (officer: clerical: subordinate), which
was earlier 27.6 percent: 50.22 percent: 22.2 percent 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 have
resorted to promoting clerks to officer cadre. Andhra Bank, for example,
promoted 1,200 clerks to officers with a 20-plus per cent pay hike.
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 officer’s Association – to articulate
their case and request the government to reconsider applications. In Punjab
National Bank (PNB), the VRS optees have formed the PNB Voluntarily
Retired Staff Association (PNBVRSA), which has filed a case against the
bank for settling outstanding issues arising out of the “separation” scheme
offered recently. Also, ironically, the financial package didn’t appeal to
optees who opted for the lumpsum payment mode. Though the VRS
5
amount was as high as Rs. 8 lakh to Rs. 10 lakh per employee, most
employees would have preferred a monthly pension scheme. Usually in
public sector banks, the management has an interface with the employees,
offering them a counseling-cum-discussion session. But in this case, since
a huge number of employees were in the process of exit, this procedure
was skipped just by clinically reducing the headcount.
A good VRS 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. On the other side, corporates are significantly more focused in
their VRS implementation with a certain amount of subtle man-marking.
For example, when Tata Steel started its VRS, a planned and phased
implementation over five or six years saw an ordered reduction in staff.
The employees leaving were also offered counselling and guidance for
post-VRS employment.
1.2 Research Problem
The liberalization process which began in India in 1991 gave green
signal for industrial and labour restructuring in all sectors of industries in
India. This led to many industries both in public and private sector to go
for large scale industrial restructuring and the resultant downsizing or
rightsizing of the labour force. As it was not possible to retrench the surplus
workmen, the peaceable way for the exit of excess flab was the introduction
of VRS.
6
Thus, the Govt. of India declared its policies and guidelines relating
to VRS which were implemented by various public and private sector
industries in India. As a part of making the organizations economically
viable many public sector banks also went in favour of VRS during 2000-
01. The result is the massive exit of 1,00,810 employees from 26
nationalised banks (11.7 percent)
This sudden exodus of manpower mostly skilled and highly
productive, has raised many questions before the researchers, i.e. Whether
VRS has affected the banks in its productivity, profitability and
organizational efficiency. And also whether it has made positive or
negative impacts on the banks, existing employees and other stakeholders.
This study aims at finding solution to the above problems.
1.3 Significance of the study
The New Economic Policy, 1991 engineered the process of large
scale industrial restructuring in both the public and private sectors of our
country which has caused to a massive exit of labour through manpower
adjustment rendering many to become surplus. Therefore, the Govt. of
India formally promoted the right-sizing of labour force through Voluntary
Retirement Schemes or Golden Handshakes.
The exit of employees from banking sector must have had much
impacts on the organizational performance of the banks. Moreover, it must
have resulted into positive as well as negative impacts on the socio-
7
economic conditions of the voluntary exiters and also of the remaining
employees of the banks.
Though there have been many studies conducted on this aspects in
India especially on the displaced workers of the manufacturing industries,
the studies on the implications of VRS on banking industries have been
very few and they lack in its coverage. Therefore, it is felt appropriate here
to conduct a comprehensive study on this topic which would be useful for
formulating a policy in this regard.
1.4 Objectives of the Study.
The specific objectives set for the study are as follows:
1] To study the structural and legal aspects of VRS implemented in
nationalized banks during 2000-01.
2] To study the impact VRS on the Productivity of the Public Sector
Banks
3] To analyse the effect of VRS on the profitability of the Banks
4] To examine the impact of VRS in improving the organizational
efficiency of the banks.
8
1.5 Hypotheses
H1 : The VRS has resulted in improving the organizational
efficiency of the banks.
H2 : VRS has resulted in improving the profitability of the
banks
1.6 Scope of the Study
The proposed study extends to all the 26 Nationalised Banks in India
(except Corporation Bank) which introduced VRS to reduce their excess
flab. Though some private sector banks have introduced some form of
Voluntary Separation Schemes, they shall not form part of this study.
1.7 Research Methodology
The proposed study is designed as a descriptive one based on survey
method. Relevant information for the study shall be collected from both
secondary and primary sources.
The secondary data which may be used for the study shall be collected
from:
1] Notifications, guidelines and enactments of Gvt. of India.
2] IBA Bulletin
3] Publications of Central Statistical Organization
4] Publications of the Department of Economics, Statistics and
Planning
9
5] Annual reports of the banking companies.
6] Academic studies conducted in various parts of the country and
published in various journals and periodicals
7] Websites and online journals pertaining to the topic of study, etc.
1.71 Sample Design:
Population of the study forms the 26 nationalised banks which
implemented VRS to reduce the workforce during the period between
15th November, 2000 and 31st March, 2001. The data pertaining to the
Nationalised Banks have been collected from various sources for a
period from 1996-97 to 2001-02(Pre-VRS period) and from 2002-03
to 2007-08(Post-VRS period).
1.72 Data Analysis
Apart from the logical reasoning, tables, percentages, averages,
ratios and Paired t-Test have been used for analyzing the data.
1.8 Presentation of the study
This study has been presented in Four Chapters. The First chapter
covers the Introduction, significance of the study, research problem, scope,
objectives, hypotheses, research methodology, etc. The second chapter
covers the Literature review. Third chapter is about the analysis part of the
study and fourth chapter carries Conclusions and suggestions.
10
Chapter-2
LITERATURE REVIEW
Voluntary Retirement Scheme is a long debated issue In India for
the last few decades. On the one hand it spoils permanency of
employment, which is a privilege and right that the Indian labour class
enjoyed till time and on the other hand it focus on productivity
improvement and labour realignment. The impact of the scheme on
employees, employers and on the society will be manifold and it will take
decades to assess its real repercussions. Though it is a topic of hot
discussion, field based informations are rare on this subject. What is
available are some study reports, reports of the various committees
appointed by the Government, articles and opinions by trade union
leaders, executives and experts, project work reports, Circulars, Court
judgments on various cases related to this subject and reports of RBI, IMF
and IBA. A brief description of these literatures and a gist of the reports
are presented chronologically in this chapter.
The Rapporteur’s report on the technical session over the topic
‘Economic Restructuring and the impact on labour’ held at the Annual
Conference of the Indian Society of Labour Economics, shows that while
the displacement of labour under the economic restructuring programme is
recognized as is inevitable, it was pointed out that job loss has been an
ongoing phenomenon since the mid-seventies in India. Moreover, the
country does not really have the means to protect the displaced workers
despite the claims made by the Govt. to the contrary.
11
,
Right back in 1991 IMF observed that, poor mobility and poor
productivity of labour is affecting operational efficiency of organisations.
In its report, IMF opined that “General levels of overstaffing, low skill
levels, poor incentives and the inability to dismiss or transfer easily is
preventing banks from operating efficiently and providing good customer
service”.
The observations of made by IMF in 1991 was reaffirmed in Indian
context by the Narasimham Committee in 1998. In its report, the
Narasimham Committee expressed its concern as “it seems apparent that
there are varying levels of over manning in public sector banks. The
managements of individual banks must initiate steps to measure what
adjustments in the size of their work force are necessary for the banks
to remain efficient, competitive and viable. Surplus staff, where identified,
would need to be redeployed on new business and activities, where
necessary after suitable retraining. It is possible that even after this some
of the excess staff may not be suitable for redeployment on grounds of
aptitude and mobility. It will, therefore, be necessary to introduce an
appropriate ‘Voluntary Retirement Scheme’ with incentives”. Practically
it is the report by the Narasimham Committee which paved the way for
‘VRS’ in Indian banking sector. Narasimham Committee was appointed
by Government of India to assess and recommend measures to improve
efficiency and effectiveness of Indian Financial System.
It is during this period that Maggregor,J, Peterson,S and
Schuftan,C(1998) stated that “ there are several sound arguments for civil
12
service downsizing, the main being: to reduce fiscal deficits and thus free
up domestic resources for the private sector, to reduce the effect of the
superfluous staff on management time and overhead functions, to improve
public sector productivity by tying personnel levels to adequate and
sustainable support and to limit the role of the state to those tasks that can
not be adequately, willingly or profitably performed by the private
sector.” The study supports the process of organisational restructuring in
public sector undertakings on many grounds.
In a report, Gupta (1998) stressed for up-gradation and skill
improvement of existing employees according to the current market
requirements. He pointed out that “The trade unions in Telecom have
neither opposed its expansion nor modernisation, but have repeatedly
been urging for upgrading of skills and education of the work force which
was recruited in a period for the type of work which does not exist today.
We have persistently stressed for bringing about a change in the work
culture which cannot be automatically achieved by economic
improvement.” Gupta is of the view that labour class is not adamant but
are willing and enthusiastic to accommodate changes but are to be given
sufficient training.
Regarding retrenchment compensations, one of the studies by
Haltiwanger,J and Singh,M (1999), revealed that India is one of the
countries where the retrenchment compensations are on the higher side.
The study compared the retrenchment pay outs of 37 countries says VRS
pay outs are the highest in India at $17,108 per worker on average. In
13
contrast, the figure for Poland was $ 7,669 and that for Pakistan is $25.
One of the reasons that prevent employers from adoption of VRS is the
likely heavy financial commitments that it poses. It is evidenced that the
retrenchment compensations paid in the country is not at all
internationally comparable as per the reports of Haltiwanger.
Right from the day in which VRS was thought of, there were
arguments for and against the process. Some argued in favour of VRS and
some against. Both had enough calculations to put forward.
Zen,Sidhartha (1999) substantiated with proof that ‘VRS’ is not at all
good for organisations. He opined that ‘VRS’ is becoming a failure even
in developed countries like America. Even in America there are signs of
redeployment of workers retrenched earlier. During 1996 alone there
were about 50 lakhs of such redeployments in America. He quotes this
as an example to prove that ‘VRS’ will not solve all problems. It is
evidenced from his report that VRS is helpful only in the short run. In
the long run more and more employees will be required to run the
business. It seems true in the case of India also. Though most of the banks
and insurance organisations which have retrenched employees in large
number by way of ‘VRS’ during 2001 and 2003 are recruiting new
employees in large numbers these days.
Reserve Bank of India has intervened in the issue of revival of PSBs
several times. It has set several study groups and working groups to study
the problems and prospects of PSBs especially with respect to three of the
loss making banks. In one of such study reports, Verma, MS(1999)
14
suggested for a considerable reduction in labour force. He said,
“Considering all factors involved, the group is of the view that initially a
reduction in staff strength of the order of 25% may serve the purpose and
should, therefore, be aimed at. This reduction in staff strength would help
the banks reduce costs correspondingly. This step is unavoidable since
continuing with the present strength could jeopardize the survival of these
banks. In order to control staff costs, these banks will have to resort to a
Voluntary Retirement Scheme (VRS) covering at least 25% of the
staff strength”. This also supported the implementation of VRS in PSBs.
There was greater resistance to VRS from the organised labour
class of banking sector. The AIBOA in its circular(x) called bank
employees not to opt for the Voluntary Retirement Scheme cleared by the
Government of India as it unilaterally aimed at downsizing the banks. It
also cautions that the scheme is a sinister design by Government and
bankers to end life time job security for all bank men. The circular even
designate the scheme as ‘poisonous serpent of job killer VRS’.
Reddy Y. V (2000) , in his speech organised by AIBRF National
Conference held at Kochi, stated that: “There have been some adverse
comments by some people at times regarding the quality of manpower in
the banking system. He is of the view that the quality of human resource
is very high in public sector banks. There is hardly any banking system in
the world, which is so highly involved in retail banking and
which has such high quality manpower as the Indian public sector banks.
In a way, the tragedy is that the work atmosphere especially work
15
practices have not been very conductive to efficiency. Between reduction
in manpower and expansion of business, the latter is a better option, and
banks have to create an environment in which they will be able to ensure
expansion of business through more redeployment, more training and
better incentives”.
During those days when VRS was a topic of hot discussion, many
of the Governmental bodies recommended for a change in the existing
system of employment. The Planning Commission in its report supports
contract labour for productivity. The reports says “Review labour laws;
permit hiring of contract labour with a view to improving labour
productivity”.
There were also thoughts against the concept of excess manpower
in organisations. Many eminent personalities had made write ups in
leading dailies during those days. Krishnamoorthy (2000) said that “In a
country like ours where there is no social security system, what is the other
alternative for the population of the country? How are we going to give
employment to the educated people? I do not think the banking sector
today is to a great extent over staffed”. He identified employment
generation and giving employment is the responsibility of the society. He
also hints that today PSBs are not as overstaffed as others say.
Many trade unions and other organisations issued circulars and leaf
lets opposing ‘VRS’ and its lure. The AKBEF called for withdrawal of
VRS and the publication cautions employees not to get attracted by the
lure of money and suggests that onetime payment will not stay back for
16
long.
Nathan, N & Dhawan , S(2000)says VRS package will catapult
early retirees into the highest tax bracket, making it imperative for the
early retiree to look for tax shelters. The author ranks various investment
opportunities available considering all its pros and cones.
It is observed that VRS in banks resulted in shortage of required
personnel in some areas while some other areas remained surplus. At an
average expenditure of Rs. 12 lakhs per employee, VRS exercise cost
PSBs an estimated amount of Rs. 12,000 crores.
According to Venkataratnam (1993) structural adjustments related
changes seem to make trade union‘s position more vulnerable and pose
several challenges and dilemmas. The already organized sector may
become even thinner in the short run due to adjustment reforms. The
labour market segmentation may become deeper resulting also in a reverse
movement of employment from organized to unorganized sector.
Gani (1998) in his study reveals that the restructuring initiatives will
lead to massive job displacement, slowing down of the rate of employment,
change in the structure and content of jobs, flexibilisation of labour,
disqualification complex, job security, unsettled service conditions and
decentralized wage structure..
Sankaranarayanan. K. G. (2001) in his study on VRS and displaced
workers in Kerala found that VRS has helped in improving the
organizational efficiency and productivity of the units and has not resulted
17
into any industrial unrest and the labour-management relations remained
the same as before. While it was found that VRS has created a negative
impact on the socio-economic conditions of displaced workers.
According to Bhatia (1995) VRS in many organizations has caused to
the outflow of best hands. In fact, PSUs such as Bharat Heavy Electricals
Ltd (BHEL) and Steel Authority of India Ltd. (SAIL) had to scrap the
VRS after the exodus of some of its best talent.
Dorfman & Moffett (1987); Matthews & Brown (1987); Morse et al.
(1983); Seccombe & Lee (1986) retiring from full time employment is a
milestone that marks the transition into stages of life for the millions of
employees each year. The retirement experiences can lead either to new
goals, interests and activities or to stress, rapid deterioration and
depression.
Sanjay Kumar (2015) shows the impact of VRS on is because of their
education, age and grade before opting VRS the study also projects the
expectations of the employees in terms of benefits as in most of the cases
employees who had already opted VRS, suggested that company should
continue medical facility even the employee had availed VRS because
medical reason it is one of the important reason for which employees
availed VRS. Children’s marriage, repayment of loans and family
circumstances also emerged as one of the prominent reasons for the need
of money in Indian society.
18
Atchley (1982) An important tenet of symbolic interaction theory is
that social roles provide a set of meanings and expectations that identify
and distinguish social positions and the behaviour of their occupants.
Retirement adjustment process is based on the recognition that adults
occupy multiple roles. Richardson & Kilty (1991) A consistent finding has
been that health and income are associated with retirement morale,
retirement satisfaction, and well-being.
National productivity Council’s Research Division has opined that
quality of workforce has been improved as a result of restructuring and the
workers/trade unions have become more co-operative. Moreover, there is
significant improvement in labour productivity. Chowdhary, Roy (1996)
after analyzing the restructuring process in Ahmedabad textile industry has
arrived that VRS takers, in the absence of adequate retraining and
redeployment programmes, are seldom able to rehabilitate themselves in
the long run. In the opinion of Vanstenberg (1994) voluntary exiters who
leave organizations for largely positive reasons would show little regret or
relectance about their decisions. An organizational exit would produce
simultaneously positive and negative emotions in both voluntary and
involuntary exiters as well as in the groups and organizations from which
they exited.
Akuraun Shadrach Iyortsuun & Kenneth Terngu (2013) found that
effective management of retirement life is a very crucial aspect of
personnel administration that requires careful attention. Judging from most
of the responses from employees, retirement means joy and relaxation from
19
full time work. This means that retirement if properly managed will
enhance the living standard of the retirees. That the retirement benefit
given to employees at retirement is inadequate in the face of the present
market situation. That there is a significant relationship between the
various ways through which employees can prepare for their retirement and
what to do during the retired period. Preparing for retirement entails
planning for the inevitable – the period in one’s life when he or she
withdraws from active service. The decision to retire is determined by both
micro and macro conditions. At the micro level, individualistic factors are
the dominant factors that influence one’s decision to retire while at the
macro level, wider factors beyond an individual’s control have the most
influence in the decision to retire.
Ghosh, Jayati (2006) has found that the real benefit from downsizing
is usually to be found in the balance sheets of the companies, as they can
show lower costs and therefore possibly higher profits. This is what creates
the competitive pressure across an industry for other companies to follow
suit, and to try and reduce the number of their workers.
Thaur, B S (2001) Voluntary retirement scheme is the latest mantra
of many corporate and public sector units, earlier it was called as Golden
Hand Shake. Company declares VRS on their HR plan and suitability as it
is less painful strategy adopted by the government after looking into
various option i.e. golden hand shake, voluntary separation scheme.
According to Das (1995), notwithstanding the fact that the scheme is
voluntary in nature, because of circumstantial transformation, it virtually
20
emerged as a situational compulsion for the basic survival of the industrial
organizations in India. It is a permanent elimination of workers in an
organization. In fact, it is a process of internal consolidation to improve the
productivity and reduce the cost.
Vishwanath (2003) in a study pointed out that the management could
neither provide sufficient opportunities to the VRS opted employees for
planning their post VRS prospects, nor guided them in due course of time.
Therefore, the least studied voluntary retirement schemes and compulsory
retirement schemes could have become one of the burning issues of the
present scenario (Gupta, 2001). In view of the above facts, it seems VRS
have become compulsory retirement schemes in a large number of cases.
In view of the above findings in various studies conducted in other
sectors of the economy, it is imperative here to study the implications of
VRS on public sector banks in India.
21
Chapter-3
ANALYSIS OF PRE AND POST VRS PERFORMANCE
OF BANKS
The advent of information technology coupled with the globalization
and rationalization strategies have brought about significant changes in the
field of Banking sector in India. The 26 Public sector banks in India have
gone for a structural adjustment program in the year 2000-01, resulting into
the exodus of nearly 12 employees from the nationalized banks in India.
Faced with the threat of competition from the foreign and new private
sector banks, the traditional banks employed a number of pruning measures
to improve the operational efficiency and reduce the operating costs of the
banks. These included introduction of Core banking solutions, Business
process reengineering, offering VRS to employees, training and retraining
staff, customer relationship management among others.
3.1 Employees’ Productivity
The public sector banks in India have taken large number of measures
to rightsize the employees and to improve their productivity. The
employment of technological upgradation and business process
reengineering have also helped to reduce the excess and redundant
manpower and thus to improve the organizational productivity. Following
ratios have been calculated to assess the profitability of the banks before
and after the introduction of VRS.
22
Definition of Ratios
Sl.
No. Ratio Definition of Ratio
Employee Productivity& Profitability Ratios
1 Business per
Employee Total Business*/Number of Employees
2 Profit per Employee Net Profit/Number of Employees
Employee Cost Ratios(Efficiency Ratios)
3 Employee Cost to
Operating Expenses
Payments to and Provisions for employees as a
percentage of Operating Expenses
4 Employee Cost to Total Business
Payments to and Provisions for employees as a percentage of Total Business
5 Employee Cost to
Total Assets
Payments to and Provisions for employees as a
percentage of Total Assets
*Total Business= Deposits+Advances
Table No.3.1
Employee Productivity Ratios
Period Year
Business per
Employee
(Median)Rs. Lacs
Profit per Employee
(Median)Rs. Lacs
Pre-VRS
Period
1996-97 75.28 0.57
1997-98 97.53 0.81
1998-99 112.93 0.57
1999-2000 136.26 0.79
2000-01 166.23 0.71
2001-02 192.30 1.27
Post- VRS
Period
2002-03 223.36 1.68
2003-04 263.12 2.23
2004-05 302.02 1.29
2005-06 355.79 1.68
2006-07 439.96 2.84
2007-08 549.21 3.87
Average
before VRS 103.38 0.78
Average after
VRS 279.30 2.27
Source: RBI reports
23
0.57
0.81
0.57
0.790.71
1.27
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02
Rs.
in L
acks
Profit per Employee (Pre-VRS Period)
Profit per Employee
1.68
2.23
1.29
1.68
2.84
3.87
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
Rs.
in L
acks
Profit per Employee (Post- VRS Period)
Profit per Employee
24
Table No.: 3.2
t-Test: Profit per employee After and Before VRS
After VRS Before VRS
Mean 2.265 0.786667
Variance 0.90859 0.066787
Observations 6 6
Hypothesized Mean Difference 0
Df 6
t Stat 3.666585
P(T<=t) one-tail 0.005248
t Critical one-tail 1.94318
P(T<=t) two-tail 0.010497
t Critical two-tail 2.446912
The t-Test conducted for the Profit per Employee After and Before
VRS has produced the outcome that there is significant difference between
Profitability before VRS and after the VRS.
Table No. : 3.3
t-Test: Business per employee After and Before VRS
After VRS Before VRS
Mean 355.5767 130.0883
Variance 14702.45 1914.602
Observations 6 6
Hypothesized Mean Difference 0
df 6
t Stat 4.284722
P(T<=t) one-tail 0.002589
t Critical one-tail 1.94318
P(T<=t) two-tail 0.005179
t Critical two-tail 2.446912
25
The paired sample t-Test conducted on Business per employee After
and Before VRS shows that there is significant difference between
Business per Employee Before and After VRS.
The Employee Productivity Ratios represented by ‘Business per
Employee’ and ‘Profit per Employee’ for the 6 years periods before and
after the introduction of VRS in the Public Sector Banks show that there
has been a considerable increase in the average Business per Employee and
Average Profit per Employee after the introduction of VRS. The BPE
which was Rs.75.28 lakhs in the year 1996-97 has increased to the extent
of Rs.549.21 lakhs showing a growth of more than 7 times during the 12
years’ period. Similarly the Profit per Employee has also gone up from
Rs.57,000 to Rs.3,87,000 marking a growth of nearly 7 times. The average
BPE before and after the introduction of VRS show that there has been a
growth of 2.7 times from the Pre-period of VRS to Post-period of VRS.
Similarly, the PPE also shows a growth rate of 2.91 times as compared to
the Pre-VRS period. Thus the introduction of VRS in the Public Sector
Banks in India has helped to improve significantly the profitability of the
banks to a greater extent.
26
3.2 Employee Cost Ratios
The Employee cost ratios are represented by Employee cost to
Operating Expenses, Employee cost to Total business and Employee cost
to Total Assets. These are based upon the wage bill data of individual
banks. Banks have been treating them as critical factors for improving
profitability and trying to minimizing them in relation to Operating
expenses, Total business and Total Assets. The Employee cost ratios are
presented in the following table. Table No.3.4
Employee Cost Ratios
Period Year
Employee Cost
to Operating
Expenses
Employee Cost
to Total
Business
Employee Cost
to Total Assets
Pre-VRS
Period
1996-97 71.78 1.45 2.05
1997-98 72.20 1.33 1.90
1998-99 71.81 1.34 1.88
1999-
2000 72.28 1.30 1.80
2000-01 74.23 1.30 1.98
2001-02 71.52 1.15 1.62
Post-
VRS
Period
2002-03 70.13 1.09 1.57
2003-04 68.42 1.04 1.49
2004-05 66.92 0.99 1.39
2005-06 65.26 0.95 1.35
2006-07 60.99 0.79 1.13
2007-08 58.63 0.68 0.96
Average before
VRS
72.30 1.31 1.87
Average
after VRS 65.06 0.92 1.32
27
From the above table, it is evident that there has been a consistent
decrease in the ratios of Employee cost to Operating expenses, Employee
cost to Total Business and Employee cost to Total Assets. The average ratio
of Employee Cost to Operating expenses has come down significantly from
72.3 to 65.06 after the VRS. Similarly, the Employee Cost to Total
Business has come down from 1.31 to 0.92. Moreover, the ratio of
Employee Cost to Total Assets has also come down from 1.87 to 1.32.
These show that there has been considerable decline in the wage bill of the
banks after the introduction of VRS vis-à-vis increase in the Total Business
and Total Assets. Thus VRS has enhanced the efficiency of the banks to a
greater extent.
From the Paired t-Test conducted for the ratios such as Employee
cost to Operating Expenses, Employee Cost to Total Business and
Employee cost to total Assets exhibit that there is significant difference
between the above parameters Before and After the implementation of
VRS in Public sector Banks. The p value of all these tests is less than 0.05
as evidenced from the tables 3.5,3.6 & 3.7
Table No.:3.5
t-Test: Employee cost to operating expenses
After VRS Before VRS
Mean 65.05833 72.30333
Variance 19.68078 0.970827
Observations 6 6
Hypothesized Mean Difference 0
df 5
t Stat -3.90514
28
P(T<=t) one-tail 0.005675
t Critical one-tail 2.015048
P(T<=t) two-tail 0.01135
t Critical two-tail 2.570582
Table No. :3.6
t-Test: Employee cost to total business
After VRS Before VRS
Mean 0.923333 1.311667
Variance 0.024707 0.009337
Observations 6 6
Hypothesized Mean Difference 0
df 8
t Stat -5.15542
P(T<=t) one-tail 0.000434
t Critical one-tail 1.859548
P(T<=t) two-tail 0.000869
t Critical two-tail 2.306004
Table: 3.7
t-Test: Employee cost to total assets
After VRS Before VRS
Mean 1.315 1.871667
Variance 0.05255 0.022577
Observations 6 6
Hypothesized Mean Difference 0
df 9
t Stat -4.97478
P(T<=t) one-tail 0.000382
t Critical one-tail 1.833113
P(T<=t) two-tail 0.000765
t Critical two-tail 2.262157
29
3.3 Profitability of Public Sector Banks Before and After the
VRS
In order to assess the profitability of the banks before and after VRS,
the ratios such as Profit per employee, Business per Employee, Return on
Assets, Current Ratio, Liquid Assets to Total Assets ratio and Capital
Adequacy ratio have been calculated for the Pre-VRS period and Post-VRS
period and Paired t-Test has been conducted to see whether they are
statistically significant.
The tables 3.8 and 3.9 show that there is a significant positive change
in the following parameters chosen for the study. The analysis shows that
there has been a surge in the various parameters during the post VRS
period. The Paired t-Test conducted for the all the above shows that the test
is statistically significant and the p values of all the parameters such as
Profit per Employee, Business per Employee, Return on Assets, Current
ratio, Liquid Assets to Total Assets Ratio and Capital Adequacy ratio.
30
Table No.: 3.8
Profitability and its related factors of Public Sector Banks
(Pre-VRS period)
(Average 1996-97 to 2001-02)
Sl.
No.
Nam
e of
Ban
ks
Liq
uid
Ass
ets
to
Tota
l A
sset
s (L
QA
)
Cu
rren
t R
ati
o
(CR
)
Cap
ital
Ad
equ
acy
Rati
o(C
AR
)
Pro
fit
per
Em
plo
yee
(PP
E)
Bu
sin
ess
per
Em
plo
yee
(B
PE
)
Ret
urn
on
Ass
ets
(RO
A)
1 State Bank of India 0.09 1.46 10.41 1.94 280.41 0.68
2 State Bank of Bikaner
& Jaipur 0.08 2.12 11.14 2.50 310.23 0.77
3 State bank of Hyderabad 0.07 1.55 11.03 3.13 411.12 0.87
4 State Bank of Mysore 0.07 2.21 10.01 2.21 323.74 0.82
5 State Bank of Patiala 0.07 1.98 11.15 2.68 456.05 0.91
6 State Bank of
Travancore 0.06 2.10 10.54 2.76 384.18 0.86
7 Allahabad Bank 0.07 1.76 11.12 3.17 430.41 0.92
8 Andhra Bank 0.09 1.81 11.61 3.94 474.18 0.98
9 Bank of Baroda 0.10 1.82 11.53 3.15 489.16 0.91
10 Bank of India 0.10 2.79 10.09 3.04 532.43 0.83
11 Bank of Maharashtra 0.08 1.45 11.12 1.78 390.23 0.55
12 Canara Bank 0.07 2.34 10.19 3.55 513.32 1.03
13 Central Bank of India 0.08 1.87 10.17 1.21 319.73 0.54
14 Corporation Bank 0.09 1.41 11.63 4.43 656.17 1.1
31
15 Dena Bank 0.08 1.82 10.12 1.85 385.75 0.54
16 IDBI Bnk 0.07 1.09 10.01 5.91 1019.9 0.67
17 Indian Bank 0.06 1.82 10.03 3.86 364.93 1.02
18 Indian Overseas Bank 0.07 2.07 12.19 3.01 413.53 0.79
19 Oriental Bank of
Commerce 0.08 1.86 12.06 4.13 634.93 0.94
20 Punjab and Sind Bank 0.07 1.56 10.14 2.34 314.09 0.52
21 Punjab National Bank 0.08 1.65 11.52 3.46 387.38 1.04
22 Syndicate Bank 0.08 2.02 12.00 2.18 421.47 0.79
23 UCO Bank 0.07 1.85 11.52 1.76 430.07 0.54
24 Union Bank of India 0.06 2.24 12.15 3.22 484.15 0.84
25 United Bank of India 0.06 1.67 13.26 1.45 373.57 0.67
26 Vijaya Bank 0.07 2.23 12.52 3.03 476.49 0.71
Combined
Average 0.76 1.87 11.13 2.91 449.14 0.80
32
Table No.: 3.9
Profitability and its related factors of Public Sector Banks
(Post-VRS period)
(Average 2002-03 to 2007-08)
Sl.
No.
Nam
e of
Ban
ks
Liq
uid
Ass
ets
to T
ota
l
Ass
ets
(LQ
A)
Cu
rren
t R
ati
o
(CR
)
Cap
ital
Ad
equ
acy
Rati
o
(CA
R)
Pro
fit
per
Em
plo
yee
(PP
E)
Bu
sin
ess
per
Em
plo
yee
(BP
E)
Ret
urn
on
Ass
ets
(RO
A)
1 State Bank of India 0.11 1.86 13.03 2.97 420.45 0.89
2 State Bank of Bikaner & Jaipur
0.10 2.46 12.92 3.50 410.63 0.97
3 State bank of Hyderabad 0.09 1.85 13.05 4.29 571.52 1.07
4 State Bank of Mysore 0.08 2.56 12.11 2.80 433.71 1.02
5 State Bank of Patiala 0.08 2.98 13.08 3.70 616.06 1.01
6 State Bank of
Travancore 0.07 3.20 12.45 3.56 524.38 0.96
7 Allahabad Bank 0.08 3.26 12.42 3.97 550.91 1.06
8 Andhra Bank 0.09 3.81 13.92 4.90 611.90 1.34
9 Bank of Baroda 0.12 3.84 13.33 4.85 670.80 1.01
10 Bank of India 0.11 4.29 11.99 3.64 642.49 0.92
11 Bank of Maharashtra 0.10 2.15 11.92 2.01 490.29 0.65
12 Canara Bank 0.10 3.54 12.89 4.50 643.52 1.13
13 Central Bank of India 0.09 2.47 11.31 1.61 419.83 0.57
33
14 Corporation Bank 0.11 2.46 14.76 6.40 820.83 1.39
15 Dena Bank 0.09 2.45 10.89 3.05 575.73 0.74
16 IDBI Bnk 0.08 1.64 11.03 7.98 1629.8 0.64
17 Indian Bank 0.08 3.31 11.13 4.36 484.91 1.22
18 Indian Overseas Bank 0.09 3.10 12.89 3.21 533.54 0.99
19 Oriental Bank of
Commerce 0.10 3.36 12.27 5.61 834.96 1.14
20 Punjab and Sind Bank 0.10 3.01 12.14 2.84 544.01 0.62
21 Punjab National Bank 0.10 2.82 12.71 4.11 520.34 1.14
22 Syndicate Bank 0.09 2.71 12.00 2.68 520.39 0.95
23 UCO Bank 0.09 3.15 11.52 2.26 560.09 0.66
24 Union Bank of India 0.08 3.26 12.15 4.32 574.85 1.04
25 United Bank of India 0.09 2.12 13.26 1.96 443.64 0.77
26 Vijaya Bank 0.09 2.88 12.52 3.25 546.40 0.93
Combined Average 0.09 2.73 12.45 3.78 599.85 0.96
34
Table No.: 3.10
t-Test: Liquid Assets to Total Assets
After VRS Before VRS
Mean 0.092692 0.075769
Variance 0.00014 0.000129
Observations 26 26
Hypothesized Mean Difference 0
df 50
t Stat 5.253006
P(T<=t) one-tail 1.54E-06
t Critical one-tail 1.675905
P(T<=t) two-tail 3.09E-06
t Critical two-tail 2.008559
Table No.: 3.11
t-Test: Current Ratio
After VRS Before VRS
Mean 2.866923 1.867308
Variance 0.430022 0.124572
Observations 26 26
Hypothesized Mean Difference 0
df 38
t Stat 6.844343
P(T<=t) one-tail 2E-08
t Critical one-tail 1.685954
P(T<=t) two-tail 4E-08
t Critical two-tail 2.024394
35
Table No.: 3.12
t-Test: Capital Adequacy Ratio
Post-VRS Pre-VRS
Mean 12.44962 11.12538
Variance 0.803532 0.827274
Observations 26 26
Hypothesized Mean Difference 0
df 50
t Stat 5.287486
P(T<=t) one-tail 1.37E-06
t Critical one-tail 1.675905
P(T<=t) two-tail 2.73E-06
t Critical two-tail 2.008559
Table No.: 3.13
t-Test: Return on assets
After VRS Before VRS
Mean 0.955 0.801538
Variance 0.04705 0.030078
Observations 26 26
Hypothesized Mean Difference 0
df 48
t Stat 2.817614
P(T<=t) one-tail 0.003502
t Critical one-tail 1.677224
P(T<=t) two-tail 0.007005
t Critical two-tail 2.010635
Thus, from the above and analysis and discussion, the tests of
hypothesis can be accepted and thus the VRS implemented in the Public
36
Sector Banks in India has impacted positively to increase the profitability
of the banks after VRS and also to improve the Productivity and
Organisational Efficiency of the Banks. Thus VRS is proved as an effective
tool to reduce the excess redundant workforce so as to improve the
productivity, Profitability and Organisational efficiency of the Banks or
any other organizations. This study confirms the similar studies conducted
elsewhere in India and abroad.
37
Chapter-4
CONCLUSIONS AND SUGGESTIONS
The Voluntary Retirement Scheme(VRS) was implemented by 26
out of 27 Public sector banks in the year 2000-01.The total number of staff
strength in public sector banks at the end of March 2000 was 8,63,188 of
which 1,26,714 employees had applied for VRS. It constitutes 4.7% of its
total workforce. In the above matter, the banks were advised by the RBI to
treat the ex-gratia paid to the VRS optees as Deferred Revenue Expenditure
(DRE), which should not be reduced from Tier I Capital. The financial
position will be normalized at the end of the financial year in which the
DRE gets recovered. The RBI had fixed the maximum period of deferment
to 5 years including the year of acceptance of VRS applications by the
Banks.Thus the public sector banks could be able to save about 2,000
Crores annually and at the same time the banks could reduce the staff
strength to the tune of 12 percent.
As per the records of Finance Ministry, Govt. of India, the total VRS
compensation costs amounted to Rs.12,453 Crore till September 2001. It
is found that VRS had been opted mostly by officers (19%) and relatively
lower proportion by other employees.
The study indicates that post-VRS productivity of the employees has
increased by 26 percent which is a significant achievement for the banks
as they could neck out unwanted redundant workforce and save the
resultant labour cost. The banks could reduce the wage bill to the extent of
38
10.1 percent after introducing VRS. Moreover Banks were allowed to
amortise the VRS outgo over a perid of 4 years.
The ratio of Staff Expenses to Operational Expenses of the banks
has declined from 75.2% to 71.2% post-VRS. Among all the public sector
banks, SBI is the top gainer in the list. The wage bill has come down
substantially resulting into higher profits for all the public sector banks
which implemented VRS in India.
This study has helped to arrive at the following conclusions.
1] The VRS has resulted in improving the Profitability of banks during
the post-VRS period.
2] The VRS has helped to improve the productivity of the nationalized
banks.
3] The VRS has helped to improve the organizational efficiency of the
banks to a greater extent.
Thus VRS implemented in the Public Sector Banks in India has made
a positive impact on the overall organizational performance of the banks
during the post-VRS period. It could also be seen that VRS is the
appropriate method to remove the excess flab peaceably from the
organizations without resorting to any labour unrest. It also helps in
removing the unproductive and redundant employees and thereby
improving the labour productivity to a greater extent.
39
4.1 Theoretical Contributions
The findings of this study reaffirm the theory of Karl Marx’s
Industrial Reserve Army and Theory of Surplus Value. Increased use of
capital by way of investment in technology would inevitably lead to
reduction in labour force, thereby increase in the profit earning capacity of
the organizations. As the reserve army decreases, then the wages increase.
This is evidenced by the hike in the salary of the remaining employees of
the banks after the introduction of VRS. However, it is perceived as a
peaceful strategy of removing the excess flab without any bloodshed.
From the point of view of Return on Investment, VRS is considered
as the most productive investment as the savings in annual labour cost of
the banks after VRS came to the tune of around Rs.2,000 Crore. The VRS
ex-gratia was written off over a period of 5 years. Thus, VRS is considered
as most effective investment strategy as the amount used for paying out
VRS compensation would be recouped within a short period of five years
over and above the whopping amount of net additional earnings due to the
reduction in wage bill.
4.2 Managerial Implications
VRS is perceived as a most effective Human Resource Management
strategy as it would not lead to any labour unrest in the organizations.
Moreover, it would help to reduce the labour cost to a greater extent which
is otherwise a major part of the revenue expenditure of the banks. Thus the
banks could neck out the unproductive workforce and thereby increase the
40
labour productivity of the banks. It is perceived as a strategy to right size
the organizations, reduce the labour cost and increase the productivity and
profitability of the banks and other similar organizations.
4.3 Limitations of the study
This study suffers from the limitations that the primary data could not
be collected due to the paucity of time and the resources. Moreover,
contacting the VRS optees personally to get the filled-up questionnaire
from the bank employees who opted VRS was nearly impossible due to
their geographical spread and inaccessibility. Hence the implications of
VRS on the VRS exiters could not be studied.
41
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