Towards trimmer banks

One part of public sector reform, at least, seems to be going well. In April customers of public sector banks should find their banks looking decidedly different and, hopefully, more purposeful. One out of every ten bank employees has accepted voluntary retirement and a golden handshake. In some banks the figure may be higher. This is good news for banks and a good example for the rest of the public sector. It will take a while for productivity gains to show up in bank profits. But efficiency in general should go up starting almost immediately. Fewer hands mean more work for each individual and, logically, more focus and less meaningless file-pushing. It has taken far too long, almost ten years, to start trimming overstaffed nationalised banks. Not only was there union opposition, there were management qualms to overcome as well. The final push came from the top in a mid-2000 meeting between the chief executives of public sector banks and the Union finance minister proving that mountains can be moved if thereis the political will.

Assuming careful thought has gone into planning staffing strengths for different functions, banks should emerge leaner and healthier next year. But a smooth process is a big assumption to make. Firstly, there are reports that banks are losing more skilled personnel than clerical staff and too many of their talented people are opting for jobs in private sector banks and insurance companies. Valuable staff need not be lost if the VRS is well-planned. But if a hit-and-miss methodology has been followed and the best are indeed going, the banks have not done themselves a favour. Second, merely cutting down the numbers will not work miracles. New streamlined procedures and more computers must be in place. More training is necessary and more skilled staff must be put in key positions. If these parallel steps are not taken, the gains in efficiency will be limited. Third, the huge sucking sound heard in the head offices of public sector banks is the sound of thousands of crores going out on VRS packages for anestimated 80,000 early retirees. Even though part of the payout will be in deposits or bonds, the cash outflow remains large. Most banks will take a while to recoup. It is not known how many have made or are in a position to make adequate provision for this.

Public sector banks are taking their first brave step towards the future not a moment too soon. It must be followed by others to cut down the inordinately high cost of transactions and, when legislation is passed, by major financial restructuring. As Reserve Bank Governor, Bimal Jalan, reminded them at last week’s bank economists conference, the challenges to the Indian banking system are mounting. A new set of prudential norms have to be adopted in line with international practice. Those norms will be more stringent than existing ones and compel banks to raise capital in the market because the government has already recapitalised public sector banks to the tune of Rs. 20,400 crore and is not in a position to put up more. And the market will judge public sector banks more harshly than any finance minister or RBI governor ever did.