My column last week on the human resources crisis in India’s public sector banks (PSBs) evoked strong reactions from a few senior bankers. The chiefs of two public sector banks told me that my apprehensions are “highly exaggerated”. The PSBs, according to them, have the systems and processes in place to carry on and grow business. A retired chairman and managing director of one bank said that in an extremely robust PSB work culture, individual employees do not matter.
“A bank can continue to perform well even if it doesn’t have a managing director. The senior management is competent enough to run it for months,” he said.
I have my reservations about their observations though. Indeed, there are talented bankers in the public sector, but by and large, this set lacks the skills and expertise needed for risk management, credit appraisal and credit monitoring. This is evident in their balance sheets. Most PSBs have more bad assets on their books than private banks; they need to set aside dollops of money to take care of such assets and this affects their profitability. The work culture needs to change and a beginning could have been made by burying the industry-wide wage pact, but none of the PSBs are willing to take the initiative.
The PSBs are a motley group in terms of business per employee and profit per employee; return on assets and return on equity; and valuation on stock exchanges. Yet, when it comes to wages and salaries, 800,000 PSB employees are treated equally. The performers are not rewarded and the laggards are not punished. An industry-wide wage pact is the most bizarre performance appraisal that any industry can have. The benchmark for such a pact is the paying capacity of the weakest of the banks and this is unfair to the employees of strong and profitable banks. It is another story that PSB employees are better looked after than their peers in private banks. Barring a handful of executives at the top, the cost per employee in the private sector is lower than public sector banks.
The new wage settlement, effective from November 2012, when the last five-year settlement expired, ensures a 15% wage hike for PSB employees, lower than the 17.5% hike given last time. However, this is not strictly comparable as the last hike was calculated based on an employee’s remuneration, including pension and gratuity, while the basis of calculation this time does not include retirement benefits.
Demanding a 19.5% wage hike, the unions had threatened to go on a four-day strike in February, leading to the intervention of finance minister Arun Jaitley. The United Forum of Bank Unions, an umbrella body of nine trade unions, and the Indian Banks’ Association (IBA), a national bankers’ lobby, spent more than two years negotiating the settlement. The salary hike will lead to an annual outgo of Rs.4,725 crore for the 45 banks that are part of the 10th industry-wide bipartite five-year wage pact ending in October 2017.
Apart from public sector banks, most old private and foreign banks in India are also covered by this pact.
However, old private and foreign banks have only the salaries of their clerical workers covered by this, unlike PSBs, whose officers too are part of the wage agreement. Typically, once the existing settlement expires, protracted negotiations follow for years to reach a new one. The first such settlement was signed in October 1966. Apart from the IBA, the Bombay Exchange Banks’ Association, representing foreign banks in India, was involved in the first pact, which had a tenure of three years. The Bombay Association does not exist any more and foreign banks operating in India have joined the IBA.
The continuation of the industry-wide wage pact for close to 50 years makes it clear that the trade unions still have a strong hold on the industry even though the IBA always tries to extract certain commitments from the unions while negotiating the wage settlement.
For example, in 2002, while signing off on a 13.3% wage hike, the IBA, on behalf of the bank managements, got a blanket go-ahead from the unions for computerization—a move that the unions had been resisting for long. The unions also accepted transfer of employees, which was quite tough for the bank management till then, even though, theoretically, all bank employees can be transferred within a zone where the same language is spoken. This time around, the unions have extracted two extra days off a month (second and fourth Saturdays) as part of the settlement—not an entirely illogical demand in the age of digital banking.
Since the IBA starts negotiating with the unions after it gets the mandate from all banks, individual banks have the choice to break away from the industry and have their own settlement. They should start doing it now. Also, if the banks are serious about financial inclusion, they should create a separate cadre for this. Ideally, it can be done by floating a subsidiary and the employees of such a subsidiary should be locally recruited and paid much less than the employees of a bank.
Regional rural banks, or RRBs, were set up in the mid-1970s to spread banking to rural India and finance agriculture, but they have not succeeded in their mission. RRBs are owned by the central government, respective state governments (where they are located) and the sponsor banks and the employees earn as much as their counterparts in PSBs following a court order, even though their skill sets are very different.
If banks want to recruit locally for rural pockets, they cannot discriminate between urban and rural staff in terms of wages, even though the cost of living in rural India is lower than in a city. The only way this can be done is by floating dedicated subsidiaries for rural lending. The RRB experiment has failed.