University Grants Commission - Zantye College

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


Mean 355.5767 130.0883

Variance 14702.45 1914.602

Observations 6 6


df 6

t Stat 4.284722





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


Mean 65.05833 72.30333

Variance 19.68078 0.970827

Observations 6 6


df 5

t Stat -3.90514

28





Table No. :3.6

t-Test: Employee cost to total business


Mean 0.923333 1.311667

Variance 0.024707 0.009337

Observations 6 6


df 8

t Stat -5.15542





Table: 3.7

t-Test: Employee cost to total assets


Mean 1.315 1.871667

Variance 0.05255 0.022577

Observations 6 6


df 9

t Stat -4.97478





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


Mean 0.092692 0.075769

Variance 0.00014 0.000129

Observations 26 26


df 50

t Stat 5.253006

P(T<=t) one-tail 1.54E-06


P(T<=t) two-tail 3.09E-06


Table No.: 3.11

t-Test: Current Ratio


Mean 2.866923 1.867308

Variance 0.430022 0.124572

Observations 26 26


df 38

t Stat 6.844343

P(T<=t) one-tail 2E-08


P(T<=t) two-tail 4E-08


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


df 50

t Stat 5.287486

P(T<=t) one-tail 1.37E-06


P(T<=t) two-tail 2.73E-06


Table No.: 3.13

t-Test: Return on assets


Mean 0.955 0.801538

Variance 0.04705 0.030078

Observations 26 26


df 48

t Stat 2.817614





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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