Voluntary Retirement Scheme in
South Asian
Banking Sector
Thinley Namgyel (Intern)
SASFP
TABLE OF CONTENTS
Introduction
Overview of the Banking Sector
Background:
Structure & Ownership:
Performance of the Banking Sector
Reasons for Poor Performance
Voluntary Retirement Scheme
Rationale for VRS
World Bank’s policy
Shortcomings of VRS
Review of VRS Implemented – Sri Lanka, Pakistan & India
Broad Parameters of VRS
Achievements
Comparison of Schemes
VRS Planned – Bangladesh & Nepal......
i. Bangladesh Bank
ii. Nepal
iii. Bank of Ceylon
Suggested Framework for VRS
Conclusion
ANNEXURE 1
Schemes:
State Bank of Pakistan
Central Bank of Sri Lanka
State Bank of India
Nepal Bank Limited (Planned)
Bangladesh Bank (Planned)
Introduction
The voluntary retirement scheme has been implemented by some of the Central Banks and the Public Sector Commercial Banks in South Asia, since mid-nineties, as part of the banking sector reform process aimed at improving performance and efficiency. So far, the Central Banks in Sri Lanka and Pakistan and the Public Sector Commercial Banks in India and Pakistan have offered voluntary retirement schemes to about 113,847 employees at a total cost of US $ 2,854 m or per employee costs of approximately US $ 25,000. Similar plans are underway in Nepal and Bangladesh to offer voluntary retirement scheme to about more than 4,000 Central Bank and Public Sector Commercial bank staff.
The main purpose of this paper, therefore, is to learn and understand how VRS was implemented by the various banks in South Asia by a) reviewing the schemes implemented across South Asian banks in terms of the process and methodology adopted for targeting redundant employees, for determining compensation package, and provisions for retraining/counseling of voluntarily retired employees, b) assessing how the common problems of VRS such as adverse selection, over compensation and revolving door syndrome, were addressed/minimized, c) undertaking a cross country comparison of the schemes.
The paper consists of the overview of the banking sector, general discussion on the VRS and the review of VRS implemented in Sri Lanka, Pakistan and India and the VRS planned in Nepal and Bangladesh.
Overview of the Banking Sector
Background:
The banking sector in South Asia is dominated by the public sector commercial banks that account for more than 50 % of the total banking assets. As a result, the performance of the public sector commercial banks reflects the overall performance of the banking sector in South Asia, which has been poor when compared to that of private commercial banks and foreign owned commercial banks. There are number of reasons for the poor performance of the public sector commercial banks, some of which include:
- Poor governance and management;
- Weak supervision and monitoring mechanisms;
- Lack of focus;
- Ineffective human resource management policies;
- Limited computerization and automation;
- Excessive politicized Trade Unions.
These factors have resulted in weak, inefficient and unproductive public sector commercial banks with large levels of non-performing assets (ranges from about 12 % in India to about 60 % plus in Nepal) and high operating costs of which personnel costs alone amounts to about 20-30 % of the total expenditure in public sector commercial banks as compared to about 10-15 % in the private banks and foreign commercial banks. The high operating costs and the large levels of non-performing assets have resulted in increased cost of borrowings thereby constraining investments, economic growth and employment generation.
Similarly, the performance of the Central Banks has been weak in terms of effective supervision and regulation of the financial sector due to weak human resources, bloated bureaucracy and lack of computerization and automation, amongst others. The Central Banks, therefore, have launched on reforms to restructure the organization by devolving non-core functions, improving human resource base, reducing bureaucratic layers and implementing computerization/automation. As a result, VRS has become a necessary component of the reform program to for redundant employees.
The South Asian economies recognizing the vulnerabilities of a weak banking sector on economic growth and financial stability have launched on banking sector reform programs, since the mid 1990s, aimed at improving the performance and efficiency of the public sector commercial banks and also in preparation for privatization of some of these public sector commercial banks. The various reforms measures launched/planned include strengthening of regulatory and supervisory framework, restructuring/privatization of public sector commercial banks and increased computerization/automation.
Staff rationalization has been one of the major components of restructuring to reduce costs and improve productivity by rationalizing the number of staff and bank branches; outsourcing non-core functions to the private sector; redefining human resource management policies and offering voluntarily retirement schemes to surplus staff .
Structure & Ownership:
The banking sector in South Asia consists of the Central Bank, Public Sector Commercial Banks/Nationalized Commercial Banks, Private Sector Banks, Foreign Commercial Banks and specialized banks providing mainly agriculture and industrial credits. The public sector banks account for more than 50 % of the total banking assets, inspite of private and foreign commercial banks dominating the market in terms of number of banks.
Table 1 – Banking Structure
Pakistan / India / Sri Lanka / Nepal / Bangladesh / Bhutan / AfghanistanCentral Bank / State Bank of Pakistan / Reserve Bank of India / Central Bank of Sri Lanka / Nepal Rastra Bank / Bangladesh Bank / Royal Monetary Authority / Da Afghanistan Bank
Public Sector Commercial Banks / 2 / 27 / 2 / 2 / 4 / 2 / 2
Foreign Commercial Banks / 21 / 42 / 16 / 9 Joint Venture / 12 / 0 / 0
Private Commercial Banks / 13 / 32 / 9 / 4 / 30 / 0 / 0
Others / 3 Provincial Banks and 3 specialized banks / National Saving Banks & 6 Regional dev. Banks / 2 Development Banks / 4 specialized banks / 1 development bank / 4
Figure 1: Ownership of Banking Assets
Source: Annual Accounts /Pakistan Financial Sector Assessment 1999-2000/Nepal Financial Sector Study 2002.
Performance of the Banking Sector
Some of the performance and profitability indicators such as NPL to advances, net profit to assets, expenditure to income and earning per employee indicate relatively weak performance of the public sector commercial banks when compared to that of the private sector banks and foreign owned commercial banks. The high levels of non performing loans in the public sector commercial banks is mainly due to lack of effective supervision and monitoring, limited staff skills in evaluating loan applications, lack of commercial culture, and loans being approved under political influences. Similarly, the costs of operations in the public sector commercial banks are higher than in the private and foreign banks, partly due to overstaffing, lack of computerization resulting in most tasks being undertaken manually, and performance of non-banking functions on behalf of the government for which the banks are not compensated.
Table 2: Selected Banking Indicators – 2000-2001
India / Pakistan / Sri Lanka / BangladeshNPL to advances:
1. Public Sector
2. Private Sector
3. Foreign Banks / 12.4 %
5.1 %
6.8 % / 24.4 %
10.7 %
5.1 % / 17.8 %
14.7 %
7.7 % / 37.1 %
16.9 %
3.3 %
Net profit to assets:
1. Public Sector
2. Private Sector
3. Foreign Banks / 0.42 %
0.71 %
1.00 % / 0.1 %
0.3 %
0.6 % / 0.24 %
1.08 %
3.68 % / 0.5 %
1.2 %
3.0 %
Total Exp. to Total Income:
1. Public Sector
2. Private Sector
3. Foreign Banks / 86.67 %
82.83 %
74.09 % / 96.8 %
88.8 %
87.2 % / 86.69 %
86.10 %
62.92 % / 95 %
88.1 %
75.7 %
Income per employee (US $):
1. Public Sector
2. Private Sector
3. Foreign Banks / 1,200
4,043
16,760 / 25,862
53,448
144,827 / 35,384
47,692
67,092 / 71
3,267
28,571
Source: Pakistan: Financial Sector Assessment 1990-2000; Reserve Bank of India (2000-01). Bangladesh Bank Annual Report 2001-2002; CBSL.
Reasons for Poor Performance
The reasons for the poor performance of the public sector commercial banks and the Central Banks are ineffective human resource management policies, limited computerization, excessive influence of the employee unions, corruption and performance on non-banking functions. These are some of the constraints generally faced by a public sector organizations and do not necessarily apply to all bank across South Asia.
- Ineffective Human Resource Management Policies
The public sector commercial banks and the Central Banks generally follow government’s guidelines on human resource management policies for recruitment, promotion, salary structure and separation. These guidelines tend to lack meritocracy and incentive system of rewarding the performer and penalizing the non-performer. Consequently, the recruitment, promotion, separation procedures are restrictive and salaries compressed making employment within the public sector commercial banks highly unattractive for well qualified, skilled, productive professionals. As a result, most employees in the public sector commercial banks lack necessary expertise and skills required to work in a competitive and challenging environment. Thus, the quality of human resources are relatively poor when compared to that in the private and foreign owned commercial banks, which provide better salaries, better career advancement opportunities and reward systems.
Also the direct hiring is generally restricted so most vacancies are filled through internal promotion leading to large number of clerical staff being promoted to officers levels. Firing of staff is also difficult due to oppositions from the employee unions and the lengthy procedure involved. The time-based and seniority based promotion system does not motivate staff to perform as irrespective of performance, staff are promoted after having completed the required minimum number of years.
The compressed salary structure and the lack of incentives is not a common feature in most public sector commercial banks. On an average, it is estimated that the salary of top management is only about four to five times higher than the lowest paid employee in the organization. When compared to the private sector, the CEO in public sector banks earn much less than the CEO in private banks (indications are that CEO in public sector bank in Bangladesh earn about 1/5 of what a CEO in private sector banks earns). The salary structure is based on job titles and seniority rather than on an individuals capabilities and performance. In some countries like Sri Lanka, decompression of salary is not permitted legally.
These factors have resulted in oversized bureaucracy characterized by staff profile consisting of high ratio of non-professionals to professionals (averaging about 3:1), fairly old organization in terms of age structure with average staff age being around 45 years and more and large percentage of employees with more than 15 years of service.
- Limited computerization:
The pace of computerization has been much slower in the public sector commercial banks than in the foreign and privately owned commercial banks. This has been due to oppositions from the trade unions for fear of job loss, lack of urgency on the part of management to computerize, lack of funds and lack of IT personnel within the organization to advocate the benefits of IT. As a result, most of the operations in the public sector banks are carried out manually employing large number of people. The limited computerization that exists is concentrated in the head office and branches in major cities.
According to the study done by the Indian Off-Site Monitoring and Surveillance Division of the Department of Banking Supervision, the public sector banks in India had computerized only 14 % of the branches as compared to 30.7 % in old private sector banks, 100 % in new private sector banks and 98 % in Foreign Banks (2000). The number of computer literate staff was also the least in the public sector banks which stood at 21.5 %, whereas it was 34 % in old private sector banks, 100 % in new private sector banks, and 88.5 % in foreign banks. In Bangladesh, about 19 % of the public sector banks were computerized, as compared to 38 % for private commercial banks and 100 % foreign banks, according to 2001 Study on State of E-Finance in Developing Countries. In Sri Lanka, while 100 % computerization is yet to be achieved most banks are now computerized. The process has been slowly mainly due to the strong resistance from the employees union for fear of job losses. However, recent indications are that more and more employees unions across South Asia are beginning to accept computerization as inevitable for the survival of the banks and themselves. For example in India, the All India Bank Employees Associations have reached an agreement with the Indian Banks’ Association to allow banks to introduce computerization. Therefore, efforts are now being directed to strengthen the computerization process within the public sector banks.
- Excessive influences of the Employee unions:
The employee unions have been another major source for opposing reforms in the public sector commercial banks. In South Asia, the employee unions are strong, active, militant and have significant political support. Large number of unions exist within the banking sector- on an average there are at least 3-4 unions actively involved. The membership in the unions comprises largely of low level employees, also the most vulnerable group when it comes to reforms, due to which excessive influence is exerted on the human resource management aspects and other policies that threaten the position of the employees in the banks, such as computerization. Also, as staff reductions diminishes the power-base of the unions any move in these directions are opposed by the unions. This makes it extremely difficult for the banks to implement new personnel policies and procedures aimed at improving efficiency and productivity as a result it continues to perform poorly.
It is also believed that the labor legislations in South Asia provides greater rights to the employees then the employers and this has made implementation of human resource management reforms difficult. In order to balance the situation, labor policies and laws are being revised in Sri Lanka and Pakistan to minimize the negative influences of the unions on the reform process and in India, banks have entered into agreements with the unions (in case of computerization) to introduce reform measures.
- Corruption:
It is believed that the level of corruption tends to be higher in public sector commercial banks than in private or foreign commercial banks, due to low levels of salary and lack of incentives. Generally, corruption within the banking sector takes place in the form of borrowers offering bank officials with cash, gifts, other favors in return for sanctioning of the loans with minimum assessment, over valuing borrowers collateral, or by extending loan repayment periods and loan amounts without required authorizations.
- Performance of non-banking functions:
The public sector commercial banks are often required to perform functions not related to their core business such as disbursement of teachers salaries, payments to pensioners, payment of government bills etc for which banks are not compensated for the services.
These factors have resulted in high costs and ineffective service delivery by the public sector commercial banks. Efforts are being made to improve the performance of the banking sector. Most South Asian countries have already launched or are in the process of launching the banking sector reforms aimed at improving efficiency and productivity of the banks. Among others, restructuring measure is being actively pursued. Increasingly, the banks are refocusing on core competencies; redefining human resource management policies; rationalizing branch numbers; devolving and outsourcing non-core functions; increasing office automation and computerization; and the surplus staff are being offered voluntarily retirement schemes.
Voluntary Retirement Scheme
Most Central Banks and the public sector commercial banks, across South Asia, have implemented or are in the process of implementing the Voluntary Retirement Scheme (VRS) to improve performance and efficiency.
VRS has been implemented by the Central Banks of Sri Lanka; State Bank of Pakistan (Central Bank) and the three nationalized commercial banks in Pakistan; and 26 out of the 27 public sector commercial banks in India. Similar plans to implement VRS are underway in Bangladesh Bank (Central Bank of Bangladesh), the Nepal Rastra Bank (Central Bank), Nepal Bank Limited and Rastriya Banijya Bank. Table 3 and 4 illustrate the status of implementation, number of staff reduced, total cost and cost per employee.
Table 3: Schemes Implemented
Sri Lanka / Pakistan / IndiaNumber of employees retrenched:
Central Bank / 697 / 828 / -
Public Sector Banks / 0 / 11,022 / 101,300
Total / 697 / 11,850 / 101,300
Total Cost of Scheme
Central Bank / $ 22 m / $ 27 m / -
Public Sector Banks / 0 / $ 305 m / $ 2,500 m
Total (US $) / $ 22 m / $ 332 m / $ 2,500 m
Cost per Employee
Central Bank / $ 32,000 / $ 33,000 / -
Public Sector Banks / 0 / $ 28,000 / $ 24,000
US $ / $ 32,000 / $ 28,000 / $ 24,000
Note: The Central Bank of Nepal has implemented VRS in the past where about 180 employees were retrenched.
Table 4: Schemes Planned
Nepal / BangladeshNumber of employees planned:
Central Bank / 401 / 1,250
Public Sector Banks / 4,914
Total / 5,315 / 1,250
Total Cost of Scheme
Central Bank / Rs. 125 m / Taka 2,198 m *
Public Sector Banks / Rs. 3,009 m
Total(Local Currency) / Rs. 3,134 m / Taka 2,198 m
Total (US $) / $ 40 m / $ 38 m
Cost per Employee
Central Bank / Rs. 0.312 m / Taka 1.7 m
Public Sector Banks / Rs. 0.612 m
Local Currency / Rs. 0.589 m / Taka 1.7 m
US $ / $ 7,500 / $ 30,000
* Includes Tk. 2,096 m for outstanding loan adjustment (Tk. 1,302 m) and write off (Tk. 794 m) and cash payment of Tk. 102 m. Therefore, actual cash cost of the scheme would be Tk. 102 m or Us $ 1.7 m or per employee cost of Tk. 81,600 or US $ 1,400.
Rationale for VRS
Like many public sector enterprises, the public sector commercial banks and the Central Banks across South Asia suffer from bloated bureaucracy and over-staffing. Estimates indicate overstaffing in various Central Banks and Public Sector commercial Banks as follows:
Table 5: Estimated overstaffing
Central Bank of Sri Lanka / State Bank of Pakistan / Public Sector Banks in India (26) / Nationalized Commercial Banks in Pakistan (3) / Bangladesh Central Bank / Nepal Rastra Bank (Central Bank) / Public Sector Commercial Banks in Nepal (2)Existing number of employees / 1,953 / 7,158 / 863,117 / 50,343 / 5,718 / 2,163 / 10,844
Employees Targeted for VRS / 1,009 / Na / 177,405 / 25,636 / 1250 / 401 / 4,914
% Targeted / 52 % / 20 % / 51 % / 22 % / 18 % / 45 %
Large scale staff reductions are politically, legally and socially difficult, if it was to be done through enforced retirement. Politically it is difficult as most of the government’s in South Asia are democratically elected and any actions to displease the unions and the public at large could prove costly in terms of votes. Legally, forced retirements are not permitted, it requires the approval of the government and has to be adequately compensated. Socially, it would be difficult due to lack of adequate social safety nets, extended family culture where one not only support his/hers immediate family but also extended family and also as most of the other benefits such as housing, medical, education etc are tied to the job once the person losses the job he/she would also loss these benefits. Therefore to avoid political, legal and social problems, most banks have opted to “buy out” redundant staff by offering severance pay to encourage them to leave the banks on voluntarily basis.