CHAPTER I. AN OVERVIEW OF

VRS [VOLUNTARY RETIREMENT SCHEME]

IN GENERAL

I.I INTRODUCTION:

In the present globalised scenario, right sizing of the manpower

employed in an organization has become an important management strategy

in order to meet the increased competition. The Voluntary Retirement

Scheme (VRS) is the most humane technique to provide overall reduction in

the existing strength of the employees. It is a technique used by companies

for trimming the workforce employed in the industrial unit. It is now a

commonly used method to dispense off the excess manpower and thus

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improve the performance of the organization. It is a generous, tax-free

severance payment to persuade the employees to voluntarily retire from the

company. It is also known as “GOLDEN HANDSHAKE” as it is the golden

route to retrenchment. Employers refer to VRS as 'golden handshake', trade

unions call it 'voluntary retrenchment scheme', and for the

government, it is 'unstated exit policy' which means that an exit policy which

may not exist on paper.

VRS means Voluntary Retirement Scheme. Employers who want to

reduce the employee strength give some employees the option to retire

before normal retirement age. The employees may or may not accept this

option. Those who accept the option are VRS employees. The VRS

employees get the compensation. They receive lump sum from the

employers including VRS compensation, Provident Fund, Gratuity, Leave

Encashment etc. The VRS employees have to depend on income from the

investments of the lump sum for their future life.

Public sector undertakings, needs to obtain prior approval of the

government before offering and implementing the VRS.

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I.II A BUSINESS FIRM MAY OPT FOR A VOLUNTARY RETIREMENT SCHEME UNDER THE FOLLOWING CIRCUMSTANCES:-

Due to recession in the business.

Due to intense competition, the establishment becomes unviable

unless downsizing is resorted to.

Due to joint-ventures with foreign collaborations.

Due to takeovers and mergers.

Due to obsolescence of Product/Technology

Changes in technology, production process, innovation, new product

line

Realignment of business - due to market conditions.

I.III PROCEDURE FOR VOLUNTARY RETIREMENT SCHEME

FOLLOWED BY THE EMPLOYER:

The employer has to issue a circular communicating his decision to

offer voluntary retirement scheme – mentioning therein

The reasons for downsizing

The age limit and the minimum service period of employees who can

apply

The benefits that are offered. It should be noted that employees who

offer to retire voluntarily are entitled as per law and rules the benefits

of Provident Fund, Gratuity and salary for balance of privilege leave 3

up to the date of their retirement, besides

the voluntary retirement benefits.

The right of an employer to accept or

reject any application for voluntary

retirement.

The date up to which the scheme is open

and applications are received for consideration by the employer.

The circular may indicate income tax incidence on any voluntary

retirement benefits which are in excess of Rs. 5lakhs, which is

maximum tax free benefit under such schemes.

It should also indicate that those employees who opt for voluntary

retirement and accept the benefits under such scheme shall not be

eligible in future for employment in the establishment.

4

I.IV PROCEDURE FOR VRS TO BE FOLLOWED BY THE

EMPLOYEE:

An eligible employee may submit request opting for Voluntary

Retirement under the scheme to the Competent Authority through

proper channel in a prescribed proforma which shall be available in

the PSU.

The Competent Authority may after considering the application and

after giving an opportunity to the applicant; of being heard, pass a

speaking order within a period of 3 months, either accepting or

rejecting the request.

In case the Competent Authority fails to pass an order rejecting the

request by the due date as given above, the request would be deemed

to have been accepted and the employee would be retired.

A copy of every order made under above shall be given to the

employee.

An employee who is aggrieved by an order of rejection may within

thirty days from issuance of such orders file

An appeal before the Administrative Secretary of the Department

under which the concerned PSU falls, whose decision shall be final

and binding,

The date of acceptance of VRS by the competent authority will be

treated as date of voluntary retirement.

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I.V STEPS TO BE TAKEN FOR INTRODUCING AND

IMPLEMENTING VOLUNTARY RETIREMENT SCHEME:

If the company is a public sector undertaking obtain approval of the

government.

Identify departments/employees to which VRS is to be offered.

If there is a union of employees in the establishment involve the union

by communicating to them the reasons, the target group and the

benefits to be offered to those who opt for the scheme

Terms of VRS and benefits to be offered are to be mentioned in the

circular and decide the period during which the scheme is to be kept

open.

Counseling employees is an essential part of implementing the

scheme. The counseling should include what the retiring employee

can do in future i.e. rehabilitation, how to manage the funds received

under the scheme.

After receipt of applications for accepting VRS, scrutinize, decide

whose applications are to be accepted and those whose are not to be

accepted.

For those whose application are to be accepted prepare a worksheet

showing the benefits each will receive including other dues like

Provident Fund, gratuity and earned leave wages for the balance un-

availed earned leave, and tax incidence should the VRS amount

exceed Rs. 5 lakhs.

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Diagrammatic representation of steps-

7

If th e co m p an y

is a p u b lic sec to r

u n d ertak ing o b ta in ap p ro v a l

o f th e g o v ern m en

t.

Id en tify d ep a rtm en ts /em p lo y ees to w h ich V R S is to b e o ffe red

m o re .

If th e re is a u n io n o f

em p lo y ees in th e

es tab lish men t in v o lv e th e u n io n

b y co m m u n ic

a tin g to th em th e reaso n s ,

th e ta rg e t g ro u p an d

th e b en e fits to b e o ffe red

to th o se w h o o p t fo r th e sch em e

T erm s o f V R S an d

b en e fits to b e o ffe red a re to b e

m en tio n ed in th e

c ircu la r o r co m m u n ic

a tio n to em p lo y ees an d d ec id e th e p e rio d

d u rin g w h ich th e sch em e is to b e k ep t

o p en .

C o u n se lin g em p lo y ees

is an essen tia l

p a rt o f im p lem en ti

n g th e sch em e.

T h e co u n se lin g

sh o u ld in c lu d e

w h a t th e re tir in g

em p lo y ee can d o in fu tu re i.e .

reh ab ilita tion , h o w to

m an ag e th e fu n d s

rece iv ed u n d er th e sch em e.

A fte r rece ip t o f

ap p lica tio ns fo r

accep tin g V R S ,

sc ru tin ize , d ec id e w h o se

ap p lica tio ns a re to b e accep ted an d th o se w h o se a re n o t to b e accep ted .

F o r th o se w h o se

ap p lica tio n a re to b e accep ted p rep are a

w o rk sh ee t sh o w in g th e

b en e fits each w ill rece iv e

in c lu d in g o th e r d u es

lik e P ro v id en t

F u n d , g ra tu ity an d

ea rn ed leav e w ag es

fo r th e b a lan ce u n -

av a iled ea rn ed

leav e , an d tax

in c id en ce sh o u ld th e

V R S am o u n t

ex ceed R s. 5 lak h s .

I.VI THE CHALLENGES IN IMPLEMENTING EMPLOYEES EXIT:

The reasons and need to introduce VRS should be discussed with all

management staff.

The effect of downsizing including on the work or activities of the

establishment carried on is to be considered i.e. post reduction

operations to be carried on should also be planned - post plan

reduction employee deployment.

Ensure all concerned employees and managers participate in the

decision making to down size.

The downsizing plan should match with the Strategic plans of the

company.

Transparency should be seen and used in choice of persons to be

retired.

Be prepared to manage the after effects of the downsizing - both

social and psychological.

Motivate employees who will stay with the company.

Provide professional assistance to employees who agree to accept

VRS to plan their post retirement, activities and financial management

including, out placement.

The VRS should be made attractive and no pressures should be used

to ease out people.

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I.VII ADVANTAGES OF VOLUNTARY

RETIREMENT SCHEME:

There is no legal obstacle in

implementing VRS as is predominantly

encountered in retrenchment under the

labour laws.

It offers to the employee an attractive financial compensation than

what is permitted under retrenchment under the law.

Voluntary nature of the schemes precludes the need for enforcement

which may give rise to conflicts and disputes.

It allows flexibility and can be applied only to certain divisions,

departments where there is excess manpower.

It allows overall savings in the employee costs thus lowering the

overall costs.

I.VIII DISADVANTAGES OF VOLUNTARY RETIREMENT

SCHEME:

It creates fear and a sense of

uncertainty to a certain extent

among employees.

Trade unions generally protest the

operation of such schemes.

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Some of the good, capable and competent employees may also apply

for retirement.

It is found in practice that organizations may have to repeat the

scheme if there is no response or poor response to the scheme by the

employees. However there are instances when the management has

really made the schemes very attractive by making it “Golden

Handshake”.

I.IX AMOUNT OF EX-GRATIA:

An employee seeking Voluntary Retirement under the scheme will be

entitled to the compensation consisting of salary of 35 days for every

completed year of service and 25 days for every year of the balance of

service left until super annuation. The compensation will be subject to a

minimum of Rs.25, 000/- or 250 days salary whichever is higher. However,

this compensation shall not exceed 80% of the sum of the salary that the

employee would draw at the prevailing level for the balance of the period

left before superannuation. In case an employee is governed by a

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retiring/superannuation pension scheme the disbursement of pension shall

commence from the month next to the date an employee would have retired

in the ordinary course.

100% of the amount of ex-gratia payable to an employee on

opting for Voluntary Retirement under this Scheme would be paid in cash

within 60 days from the date of his relieving. An employee whose offer for

Voluntary Retirement under the Scheme is accepted will be eligible, apart

from the ex-gratia defined above, to any benefit that would have been

available to him upon superannuation as per the policy extant in the PSU

prior to the date of notification of this scheme. It is clarified, however, that

an employee shall not be eligible for both retrenchment compensation and

ex-gratia under this scheme but shall have to opt for one of the two.

I.X GENERAL CONDITIONS:

Arrears of wages due to general revision of pay scales etc. shall not be

included in computing the eligible amount.

Only completed years of service shall be reckoned for arriving at the

minimum eligible service.

Fraction of service of 6 months and above shall be reckoned as one

year for the purpose of calculating the ex-gratia. Fraction of service

less than 6 months will be ignored for the purpose of calculating the

ex-gratia.

The salary shall be calculated on the basis of last salary drawn by an

employee/officer.

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No employee shall be allowed to withdraw the request made for

voluntary retirement under the scheme after it has been accepted by

the Competent Authority.

The Competent Authority shall have absolute discretion either to

accept or reject the request of an employee seeking Voluntary

Retirement under the scheme. The reasons for rejecting the request of

any employee seeking Voluntary Retirement shall be recorded in

writing by the Competent Authority.

All payments under the scheme and any other benefit payable to an

employee shall be subject to the prior settlement/repayment in full of

loans, advances, returning of Govt.’s property and any other

outstanding due against him and payable by him to the PSU

concerned.

All payments made under the scheme shall be subject to deduction of

tax at source as per Income Tax Act 1961 wherever applicable.

An employee who seeks voluntary retirement under this scheme shall

not be eligible for re-employment in Govt., any PSU or any of its

subsidiaries. A complete data/record, on website of all those

employees of the Public Sector Undertakings / Corporations, who

have availed the VRS, shall be retained. While making future

recruitments no person out of these shall be retaken in service.

In the event of the death of an employee, whose request for voluntary

retirement under the scheme has been accepted, the compensation,

which would have become due and payable to the deceased employee,

shall be paid the nominee.

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The benefits payable under this scheme shall be in full and final

settlement of all claims of whatsoever nature, whether arising under

the scheme or otherwise to the employee. An employee who

voluntarily retires under this scheme will not have any claim against

the PSU concerned of whatsoever nature and no demand or dispute or

difference will be raised by him or on his behalf, whether for re-

employment or compensation or back wages including employment of

any of his relative on compassionate grounds.

I.XI ELIGIBILITY CRITERIA IN GENERAL:

The companies can frame different schemes of voluntary retirement

for different classes of their employees. However, these schemes have to

conform to the guidelines prescribed in rule 2BA of the Income-tax Rules.

The guidelines provide that the scheme of voluntary retirement

framed by a company should be in accordance with the following

requirements, namely:

It applies to an employee of the company who has completed ten

years of service or completed 40 years of age.

It applies to all employees, including workers and executives of the

company except Directors of the company.

The vacancy caused by voluntary retirement is not to be filled up, nor

is the retiring employee to be employed in another company or

concern belonging to the same management.

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The amount receivable on account of voluntary retirement of the

employees does not exceed the amount equivalent to one and one-half

month salary for each completed year of service or monthly

emoluments at the time of retirement multiplied by the balance

months of service left before the date of his retirement on

superannuation. In any case, the amount should not exceed rupees five

lakhs in case of each employee.

The employee has not availed in the past the benefit of any other

voluntary retirement scheme.

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CHAPTER II. VRS IN PUBLIC SECTOR BANKS

II.I INTRODUCTION:

As banking reform gathered speed and the prospect of government

hand-outs diminished, it became clear that banks could no longer afford to

be overstaffed. VRS in Banks was formally taken up by the Government in

November 1999. On a conservative estimate, it could be said that the public

sector banking system was overstaffed by roughly 1, 00,000 people. Hiring

and firing in the public sector banking industry is a highly unionized

business, subject to protracted negotiation with the Indian Banks Association

(IBA). After years of deliberation, in November 1999, the government

sanctioned the release of the VRS to the IBA. Between November 15, 2000

and March 31, 2001, all public sector banks, except Corporation Bank,

introduced VRS.

Corporation Bank felt that it might be difficult for the bank to come

up with a blanket VRS offer for its staff in the same vein as was done by

other PSU banks since a recruitment drive is on at the other end. The bank

was hiring fresh hands, both in the officer and clerical grades, on account of

its expansion plans drawn up with Life Insurance Corporation of India

(LIC). Corporation Bank was the only public sector bank that chose to stay

out of the recent industry-wide VRS exercise that resulted in Government-

owned banks shedding nearly 11 per cent of its earlier staff strength.

Under the uniform VRS scheme devised by the Indian Bank’s

Association (IBA) for the PSU banks, the offer could be availed by all who 15

met the criteria of minimum age or service requirement. However, the IBA

scheme did provide the management with the final say in the matter of

accepting a VRS application by allowing the bank to reject applications

received from staff with specialized skills that the bank might find difficult

to replace.

Corporation Bank was not to be in the mood to avail this option since

it wanted to avoid the possibility of big queues at the VRS window. "If we

finally decide to have a VRS in the bank we might approach the Government

for being allowed to make a special offer that would be limited to only those

pockets which are identified as surplus," bank officials told Business Line.

The following figure shows the percentage of employees who opted

for VRS before March 2001 in 26 public sector banks. As seen below, the

portion in red denotes the percentage of the number of employees who opted

for VRS:

% of Employees who did not opt

for VRS

% of Employees who opted for VRS

16

In 2000-01, the staff cost of all the 27 public sector banks (including

Corporation Bank, which did not opt for VRS), was Rs 21,050 crore. By

2001-02, staff costs had dropped to Rs 18,959 crore.

175001800018500190001950020000205002100021500

21,050

2000-01

18,959

2001-02

Staff Cost of employees which did not opt for VRS

Finally the Government then had cleared a uniform Voluntary

Retirement Scheme (VRS) for the banking sector, giving public sector banks

a seven-month time-frame. The IBA had allowed the circulation of the

scheme among the public sector banks for adoption. The scheme was kept

open till March 31, 2001. It was made operational after adoption by the

respective bank’s board of directors. No concession was given to weak

banks under the scheme.

According to Indian Banks Association (IBA), the total staff strength

in public sector banks at the end of March 2000 was 8,63,188 out of whom

1,26,714 or 14.7 per cent applied for VRS. About 80 per cent of the numbers

of applications were accepted, and the staff relieved under VRS until

December 31,2001 were 1,01,300. This constituted 11.7 per cent of the total

staff strength at the end of March 2000.

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Banks were faced with cutthroat competition from the new private

sector banks, state-owned banks have taken to the task of cutting costs very

seriously. Despite a clear lead in terms of time, clients and network, public

sector banks lagged far behind the new private sector in profitability. Their

flab showed in their bottom lines. Banks having implemented VRS were

State Bank of India, Bank of Maharashtra, Bank of India, Syndicate Bank,

Oriental Bank of Commerce, Punjab National Bank, Union Bank of India,

Indian Overseas Bank, Allahabad Bank, Andhra Bank, Standard Chartered

Bank, Vijaya Bank, Punjab & Sind Bank, Indian Bank, Bank of Baroda,

Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, UCO

Bank and United Bank.

Speaking to a business magazine, Purushan Vava, chief manager,

Punjab National Bank said, "The whole idea of implementing VRS is to save

costs and improve our productivity." About 7,000 employees of Punjab

National Bank opted for VRS. In a special arrangement with their

employees, the PNB management had issued bonds equivalent to 50 per cent

of the ex-gratia payment made to the VRS employees, encashable after 5

years.

NS Nayak, general manager, Bank of India, had identified 10,000

excess people out of which 7,766 availed the VRS scheme. While 7,400 had

already been relieved, the case of balance 366 was decided on disciplinary

grounds.

India's largest bank, State Bank of India, had also implemented VRS

and about 21,000 employees out of a total of 233,000 opted for the scheme

in fiscal 2001, according to SBI sources.

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Implementation of VRS also helped improve efficiency. RM Nayak,

general manager, credit & international banking, Bank of Maharashtra told a

business magazine, "Not only has our bank now become more customer

friendly after implementing VRS, it is also more profit oriented largely

because the average age of our employees has fallen to 49 from about 55 a

few years ago." Similarly for Bank of India, the average age has come down

to 49 from about 54 a few years ago. Clearly, cost cutting is set to have its

impact on banks' profits as well as profitability.

II.II ELIGIBILITY CRITERIA:

All permanent employees with 15 years of service or 40 years of age

The following employees will not be eligible for this scheme:

Specialists officers/employees, who have executed service bonds &

have not completed it, employees/officers serving abroad under

special arrangements /bonds, will not be eligible for VRS. The

Directors may however waive this, subject to fulfillment of the bond

& other requirements.

Employees against whom Disciplinary Proceedings are contemplated /

pending or are under suspension.

Employees appointed on contract basis. Any other category of

employees as may be specified by the Board.

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II.III AMOUNT OF EX-GRATIA:

60 days' salary (pay plus stagnation increments plus special allowance

plus dearness relief) for each completed year of service or the salary for the

number of month’s service is left, whichever is less.

II.IV OTHER BENEFITS:

Gratuity as per Gratuity Act/Service Gratuity, as the case maybe.

Pensions (including commuted value of pension)/bank's contribution

towards PF, as the case may be.

Leave encashment as per rules.

II.V OTHER FEATURES:

It will be the prerogative of the bank's management either to accept a

request for VRS or to reject the same depending upon the requirement

of the bank.

Care will have to be taken to ensure that highly skilled and qualified

workers and staff are not given the option.

There will be no recruitment against vacancies arising due to VRS.

Before introducing VRS, banks must complete their manpower

planning and identify the number of officers/employees who can be

considered under the scheme.

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Sanction of VRS and any new recruitment should only be in

accordance with the manpower plan.

II.VI FUNDING OF THE SCHEME:

Coinciding with their financial position and cash flow, banks may

decide payment partly in cash and partly in bonds or in installments,

but minimum 50% of the cash instantly and remaining 50% after a

stipulated period.

Funding of the scheme will be made by the banks themselves either

from their own funds or by taking loans from other banks/financial

institutions or another source.

II.VII SABBATICAL:

Here, the employees were allowed to go on a long leave without pay

with an aim to cut costs. An employee/officer who may not be interested to

take voluntary retirement immediately can avail the facility of sabbatical for

five years, which can be further extended by another term of five years.

After the period of sabbatical is over he may re-join the bank on the same

post and at the same stage of pay where he was at the time of taking

sabbatical. The period of sabbatical will not be considered for increments or

qualifying service for person, leave, etc.

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To minimise the immediate impact on banks, the scheme allowed

them the stagger the payments in two installments, with a minimum of 50

per cent of the amount to be paid in cash immediately. The remaining

payment can be paid within six months either in cash or in the form of

bonds.

II.VIII TREATMENT OF VRS EXPENDITURE:

The Institute of Chartered Accountants of India (ICAI) urged the

Government to allow the expenditure incurred under voluntary retirement

schemes (VRS) as a deductible expenditure to the extent they are written off

in the profit and loss account. The institute advocated such a treatment

irrespective of whether the VRS amounts paid constituted the capital

expenditure or not.

According to ICAI, the provision in the present form would place

`great strain' on the cash resources of an enterprise which is implementing a

VRS as it would also have to pay income tax at the applicable rate on the

unamortized portions of such payments .

The opinion stated that out of the components of the VRS package,

the lump sum paid on ex gratia could alone be treated as deferred revenue

expenditure and the other components have to be expensed straightway.

With the banks and the Government having sewed up all the corners,

the question arose as to the plight of the retirees. As a sop to them, Section

10 (10C) was brought into the Income tax Act, wherein any amount received

22

at the time of retirement was exempt to the extent of Rs.5 lakhs. This was

apart from the gratuity and leave encashment benefits available.

"Even after the VRS is implemented, some of the banks are still over-

staffed. Productivity is still low. Ideally, the VRS should be an annual

phenomenon," said the chairman of a large public sector bank.

Post VRS, the public sector banks were finding it tough to run

operations efficiently as there were staff shortages at some pockets. Plans

were afoot to restructure the organisation by merging or closing some

branches and abolishing at least one tier of the organisational structure

(either zonal or regional offices) to avoid duplication of work and slow

decision making. Nevertheless, productivity has improved due to

downsizing.

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CHAPTER III. VRS AND TAX

III.I GENERAL OVERVIEW:

Many companies have been providing their employees the option of

voluntary retirement. This brings for the employees a pile of money, the

amount of which depends on their present salary status, years of service, and

their age. With the large sum comes an equally large tax liability. And

employees are not often clear as to the tax provisions regarding Voluntary

Retirement Scheme (VRS). They also have to depend on the employer for

tax deduction at source on such payment.

Numerous judgements have been passed in the recent past by the Madras

High Court, and various tribunals have provided relief to employees opting

for VRS.

When the public sector banks came out with a scheme to reduce their

staff strength, they structured the financial package in such a way that they

24

had the best of the deals. They wanted minimum impact of such payouts on

their financials, sought tax deductibility of the expenditure and did not want

the payout to strain their liquidity. The components of the package under the

Voluntary Retirement Scheme (VRS) included ex-gratia, gratuity, pension,

leave encashment and in some cases travel and transportation

reimbursement.

The banks were not worried about the tax deductibility of the

expenditure as they had several court decisions to support their claim.

It had been held by the Calcutta High Court that "the payment of

compensation to induce workmen to retire prematurely is an item of

expenditure incurred by the assessee company on the ground of commercial

expediency in order to facilitate carrying on of business and is revenue

expenditure and an allowable deduction.''

But perhaps fearing a substantial drop in tax collection, the Central

Board of Direct Taxes (CBDT) came out with a Circular (January 23, 2001)

whereby the expenditure on VRS was termed capital in nature on the ground

that there was an enduring advantage to the tax payers. All said and done,

this circular was on shaky grounds.

Also the retirees thought that the lump sum paid, having been based

on the years of service served or remaining, as the case may be, or as a

payment in the nature of profits in lieu of salary would fall within the ambit

of Section 89(1) of the Income Tax Act, which allowed a tax relief to lessen

the burden of tax which arises because of income relatable to a few years

being received in one stroke. In this scenario, banks wanted to cover one

more angle in the process, which was to ease the strain on their liquidity.

Hence they agreed to meet their commitment to the retirees in annual

25

installments and in some cases through issue of bonds. It was then that all

hell broke loose.

Since the banks paid the compensation in installments, the exemption

under Section 10 (10C) of the Income-tax Act 1961 was restricted to first

such annual installment and the retirees were denied the promised Rs. 5

lakhs exemption. To a great extent, the installments which followed had to

suffer tax with no exemption whatsoever.

Secondly, in some cases the tax department argued that the annual

installments mainly meant the method of payment but the income being

accrued in its entirety in the year of retirement, the entire compensation

would have to suffer tax in that year. The plight of the retirees was indeed

sorrowful. , the law makers wanted to restrict the exemption on the amount

received to the extent of Rs.5 lakhs in a person's career and hence introduced

certain words to that effect. These have been twisted out of shape and the tax

relief under Section 89(1) claimed by the retirees on account of their tax

burden going up because of the VRS package was also denied.

It should be noted that while the banks and the Government took

enormous care to preserve their self interests, the retiree who was without a

job, with returns on his meager investments dwindling rapidly and with no

social security cover, was left to fend for himself.

Neither his former employer nor the union to which he belonged nor

the government which supported such grandiose schemes to keep with the

times, have come to their rescue till date. All that they have witnessed is

strict and cynical interpretation of law and nothing else. Section 10(10C) of

the Income Tax Act, 1961 provides for a one-time exemption to an

employee opting for voluntary retirement or termination of his service, in

26

accordance with any scheme of voluntary retirement to the extent of Rs

5,00,000. Further, where an exemption has been allowed to an employee

under this Section in any year, no further exemption will be allowed under

this Section in relation to any other year.

The guidelines in respect for claiming exemption under Section

10(10C) are provided under Rule 2BA of the Income Tax Rules, 1962. As

per Rule 2BA, exemption under Section 10(10C) is available to an employee

only if the scheme of voluntary retirement framed by the company or

authority or co-operative society or university or institute, as the case may

be, or if the scheme of voluntary separation framed by a public sector

company, is in accordance with the specified requirements which are

mentioned as under:

III.II ELIGIBILITY FOR RS 5-LAKH EXEMPTION:

The Voluntary Retirement Scheme has to meet the following

requirements:

It will apply to an employee who has completed 10 years of service,

or is aged over 40 years;

It applies to all employees (except directors) including workers and

executives of a company or of an authority or of a cooperative society;

The scheme of voluntary retirement or voluntary separation has been

drawn to result in overall reduction in the number of the employees;

The vacancy caused by the voluntary retirement or voluntary

separation is not to be filled up;

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The retiring employee of a company shall not be employed in another

company or concern belonging to the same management;

The amount on account of voluntary retirement of the employee does

not exceed the amount equal to three months' salary for each

completed year of service, or salary at the time of retirement

multiplied by the number of months of service left before the date of

his retirement.

In case of a public sector employee opting for voluntary retirement,

the requirement that he should be at least 40 years of age or should have

completed 10 years of service, would not apply if the proceeds are as per the

scheme of voluntary separation framed by such public sector company.

When an employee opts for voluntary retirement he has to consider the

taxability of all sums received. Generally the proceeds fall under the

following categories:

A. Gratuity:

The gratuity is totally exempt under

Section 10(10C) of Income Tax Act. For other

employees, gratuity is exempt under Section

10(10C) up to Rs 3,50,000. Any gratuity in

excess of Rs 3,50,000 shall qualify for rebate

under Section 89(1).

28

B. Leave Encashment:

This shall be exempt under Section 10(10AA) to the extent specified

therein. Section 10(10AA) grants exemption for leave encashment in respect

of earned leave at the credit of the employee at the time of his retirement, on

superannuation, or otherwise.

C. Provident fund:

Payment received from

provident fund shall be exempt under

Section 10(11) of the Income Tax Ac

D. For sums other than those referred to in (i), (ii) and (iii), exemption

under Section 10(10C) is available to the extent of Rs 5, 00,000.

There was a lot of controversy about whether relief under Section

89(1) should be available to employees opting for voluntary retirement for

an amount in excess of exemption of Rs 5, 00,000 under Section 10(10C).

According to the provisions of Section 89, where an assessee receives any

money in the nature of salary because of which his total income is assessed

at a rate higher than that at which it would otherwise have been assessed, the

assessing officer shall - on an application made to him in this behalf - grant

such relief as may be prescribed.

29

III.III REBATE FOR VRS OVER RS 5 LAKH:

Compute the average rate of tax on the total income including VRS

receipts in excess of Rs 5 lakh in the year of receipt.

Find out the tax on payment received under VRS in excess of Rs 5

lakh at the average rate of tax computed in the first step.

Add one third of the amount received under VRS in excess of Rs 5

lakh to the total income of each of the three preceding years, and

compute average rate of tax for these three preceding years.

Find out the average of the three tax rates computed in the third step;

compute tax on the average rate on the amount received under VRS in

excess of Rs 5 lakh.

The difference in tax computed in the second and fourth steps shall be

the relief under Section 89(1).

Below mentioned are the summarized income tax provisions that the employee has to work out while opting for voluntary retirement scheme:

30

The example in 'Rebate for VRS over Rs 5 lakh' alongside shows you

how the relief can be computed. Moneys in the nature of salary refers to

amounts received in arrears or in advance and includes receipt in any one

31

financial year, of salary for more than twelve months or any payment which

is treated as profit in lieu of salary being paid in arrears.

The receipts on voluntary retirement by an employee are taxed in his

hands under Section 17(3) that is profits in lieu of salaries. Thus, the relief

under Section 89 is also applicable to employees opting for VRS after

exemption under Section 10(10C) has been exhausted. As mentioned earlier,

VRS proceeds can run into large sums of money.

Therefore it is important that one utilizes the benefits available under

the Income Tax Act.

32

CHAPTER IV. VRS AND EMPLOYEES

IV.I INVESTMENT OF VRS AMOUNT:

With the advent of the Senior Citizens Savings Scheme, those opting

for retirement, voluntary or otherwise, suddenly had a window of

opportunity. However, the moot question that such people face is obvious --

should they be opting for the VRS (voluntary retirement scheme) in the first

place? Life presents very few occasions to an individual where a decision

taken has a great impact on not only his own future but also that of his

family members. An offer of VRS is one such important occasion.

33

IV.II ANALYSIS WITH EXAMPLE:

Let us take a live case of one such person, whose particulars are

provided in the table.

Table

Age 45 years 7 months

Service put in 26years 2 months

Residual service 14 years 5 months

Current gross pay Rs. 15,668

Entitlement for VRS Ex-

gratia

Rs. 7,45,308

PF Rs. 3,46,910

Leave Encashment Rs. 1,51,050

Gratuity Rs. 2,99,565

Pension Commutation Rs. 1,14,328

Total Rs. 16,57,161

Monthly Pension Rs. 6,138

The ex-gratia is exempt up to Rs 500,000.Assuming that the rest of

the amount is subject to tax at the highest rate of 33.66 per cent, the amount

remaining in hand works out at Rs 662,737.

[745,308 - 500,000 =245,308]

[33.66% of 245,308 = 82,571]

[745,308 - 82,571 = 662,737]

34

Since the rest of the benefits suffer very little tax, if any, the total

investible amount in hand is Rs 15, 74,590. Now the question is, should this

person continue in service or should he opt for the retirement scheme?

Since the rest of the benefits suffer very little tax, if any, the total

investible amount in hand is Rs 15, 74,590. Now the question is, should this

person continue in service or should he opt for the retirement scheme?

For the sake of comparison, we shall ignore the taxes and the tax

planning strategies that can be adopted.

IV.III TIME VALUE OF MONEY IF VRS IS TAKEN:

For abundant precaution, we shall assume a very conservative interest

rate of 8 per cent p.a., payable monthly, even when it is possible to park

investible funds in avenues yielding 9 per cent p.a., payable quarterly.

At 8 per cent, on Rs 15,74,590 the interest will be Rs 10,497 every

month. Add to that the pension. The total monthly income will be Rs 16,635,

which is Rs 967 more than the salary he is earning at present. The future

value of an annuity of Rs 967 received per month, at the end of 14 years and

5 months (which is his period of residual service) is Rs 3,14,905.

Now, one immediate and obvious conclusion that the above analysis

throws out is that the employee will not be required to sacrifice his financial

lifestyle in case he opts for the VRS. This is because his gross pay was Rs

15,668 per month, whereas the aggregate of interest on the VRS amount and

the pension works out to Rs 16,635.

35

However, one point hitherto not considered is that, if the employee

continues in his service, his salary will rise with time and consequently,

there will be incremental effects on gratuity, Provident Fund, etc. But on the

other side of the coin, there will be no ex-gratia of Rs 6,62,737 plus the

future value of annuity of Rs 3,14,905, aggregating to around Rs 9.75 lakh

(Rs 975,000). The possibility of the incremental values of these benefits

taken together with the increase in salary at the time of normal retirement

being substantially higher than the ex-gratia offered right now certainly

looms large. However, the following additional factors have to be taken into

consideration before taking the decision.

IV.IV RESIDUAL BENEFITS:

Most employers continue to give some benefits to their retired

employees. These may be in terms of annual domiciliary medical expenses,

hospitalisation expenses with a high ceiling, continuation of housing loan,

allowing the employee to retain their provident fund dues with their

employer for a specified period, etc.. .

Till about 10 years ago, the voluntary retirement scheme was an

anathema in the public sector banking industry, possibly the most over-

manned white-collar citadel ruled by trade union leaders.

36

CHAPTER V. IMPLEMENTATION OF SCHEME IN

SBI

(STATE BANK OF INDIA)

V.I INTRODUCTION:

State Bank of India (SBI) is the largest state

owned banking and financial services company in India, by almost every

parameter - revenues, profits, assets, market capitalization, etc. The bank

traces its ancestry to British India, through the Imperial Bank of India, to the

founding in 1806 of the Bank of Calcutta, making it the oldest commercial

bank in the Indian Subcontinent. Bank of Madras merged into the other two

presidency banks, Bank of Calcutta and Bank of Bombay to form Imperial

Bank of India, which in turn became State Bank of India. The Government

of India nationalized the Imperial Bank of India in 1955, with the Reserve

Bank of India taking a 60% stake, and renamed it the State Bank of India. In

37

2008, the Government took over the stake held by the Reserve Bank of

India.

SBI provides a range of banking products through its vast network of

branches in India and overseas, including products aimed at NRIs. The State

Bank Group, with over 16,000 branches, has the largest banking branch

network in India. With an asset base of $352 billion and $285 billion in

deposits, it is a regional banking behemoth. It has a market share among

Indian commercial banks of about 20% in deposits and advances, and SBI

accounts for almost one-fifth of the nation's loans.

SBI has tried to reduce over-staffing by computerizing operations and

"golden handshake" schemes that led to a flight of its best and brightest

managers. These managers took the retirement allowances and then went on

to become senior managers in new private sector banks.

V.II VRS IMPLEMENTATION:

History of VRS up to the date of implementation by the respective

PSBs, which commenced on 01.09.2000, was common for all the banks. The

difference in VRS between banks to bank manifested only at the point of

implementation, i.e. when the results were achieved.

The package differed from bank to bank but had been broadly

structured around the "model" prescribed by the IBA. There was no

difference in the eligibility criteria of officers or the quantum of

compensation. Individual banks had discretion in defining the category of

38

employees, who were to be kept outside the preview of VRS and who were

not eligible to apply for the same.

Individual banks also had the discretion regarding the mode of

disbursement. The model proposed that banks offer to pay 50 per cent of the

settlement in cash and the balance in bonds with a lock-in period of three

years. However, State Bank of India (SBI), the largest Indian bank, offered

to settle fully in cash. According to figures available by early February, of

the estimated one lakh and odd employees who offered to accept the

package, at least 33,000 were from the SBI. However SBI has accepted VRS

applications of only 20784, of which there were 6,694 officers, 11,271

clerical staff and 2,819 subordinates.

On a bank-wise break-up, SBI's estimated cost for VRS was the

highest at Rs 1,500 crore. And average cost per employee worked out to

Rs.6.52 Lacs. It was claimed that operating expenses for SBI in 2001-2002

increased by only 3.64% mainly due to savings in staff cost after Voluntary

Retirement Scheme in the last fiscal year.

The SBI is the largest bank in India in terms of network of branches,

revenues and workforce. It offers a wide range of services for both personal

and corporate banking. The personal banking services include credit cards,

housing loans, consumer loans, and insurance. For corporate banking, SBI

offers infrastructure finance, cash management and loan syndication.

Over the years, the bank became saddled with a large workforce and

huge NPAs. According to reports, staff costs in 1999-2000 amounted to Rs

4.5 billion as against Rs 4.1 billion in 1998-99. Increased competition from

the new private sector banks (NPBs) further added to SBI’s problems.

39

Though SBI had 9,000 branches, a mere 22% of those (1935

branches) were connected through Internet. SBI’s net profit per employee

was Rs 0.43 million and SBI’s NPA level was around 7.18%.

The table given below shows the data of other banks for comparison with

SBI’s.

A COMPARISON BETWEEN SBI & SOME NPBs

Table:

BANK NPAs/NET

ADVANCES

PROFIT PER

EMPLOYE E

(Rs in Millions)

SBI 7.18% 0.43

HDFC 0.77% 0.96

UTI BANK 4.71% 0.69

ICICI BANK 1.53% 0.78

From the above table it is clearly indicated that SBI was far from the

standards that could be arrived from analyzing other banks NPA’s and profit

per employee.

Analysts remarked that the very factors that were once hailed as the

strengths of SBI - reach, customer base and experience - had become its

problems. Technological tools like ATMs and the Internet had changed

banking dynamics. A large portion of the back-office staff had become

redundant after the computerization of banks. To protect its business and

40

remain profitable, SBI realized that it would have to reduce its cost of

operations and increase its revenues from fee-based services. The VRS

implementation was a part of an overall cost cutting initiative.

SBI faced a lot of protest against VRS from its employees due to

varying reasons. In spite of all such protests, SBI received around 35,000

applications for the VRS. Analysts pointed out that many bank employees

opted for the VRS due to the better employment prospects. SBI had not

anticipated such a huge response to the scheme. While the VRS was mainly

aimed at reducing the clerical staff and sub-staff, the maximum number of

optees turned out to be from the officer cadre. The clerical staff was

reluctant to go for the VRS due to the low employment opportunities for

them. According to reports, the number of applications from officers stood at

19,295, which meant that over 33 per cent of the total officers in the bank

had sought VRS.

While announcing the VRS on December 27 2000, SBI had merely

stated that the management would relieve only those officer cadre applicants

who had crossed the age of 55 years. The bank also issued circular barring

treasury managers, forex dealers and a host of other specialized personnel,

from seeking VRS. Employees who had not served rural terms were also

barred from opting for the scheme. The VRS was also not open to

employees who were doctorates, MBA’s, Chartered Accountants, Cost &

Works accountants, postgraduates in computer applications. Another

category barred from the VRS consists of employees who have received

training at any Indian Institute of Management, the National Institute of

Business Management, the Xavier Labour Relations Institute and trainers

who have undergone training on behavioral sciences. Technical training is

41

also a disqualification - applying to those trained in computer or information

technology related areas at specialized external institutes in India or abroad

and those with training in derivatives. According to highly placed SBI

sources, the original VRS and the restrictions that followed have left hardly

any significant department open to the VRS. A source said that the aim of

the VRS was to reduce the large numbers of the award staff but most of the

applicants were officers. "So SBI came out with tough stipulations to

discourage the officers," an SBI official said.

In another circular, SBI mentioned that any break in service (i.e.

leaves availed on a loss of pay basis) would not be taken while calculating

the service period. The bank also restricted the loan facilities to the

personnel who had opted for the VRS. If an employee wished to continue a

housing loan after accepting VRS, he was asked to pay interest at the market

rate. After these restrictions were introduced, only 13.4% of the officers

were left eligible for VRS instead of the earlier 33%.

The conditions laid down by the management faced strong criticism

from the officers who had opted for the VRS, but who could not meet the

prescribed criteria. They alleged that the bank was practicing discrimination

in implementation of the scheme and that no other banks had implemented

such policies and denied the opportunity of VRS to officers who were

willing to avail the scheme.

While the bank authorities considered SBI’s VRS agenda meticulous,

sources inside the bank strongly believed that the bank should have phased

out its VRS implementation because of the disruptions it caused. For

instance, in some cases, the bank’s managerial employees had to share some

clerical functions, which delayed the clearance process. Irate customers of

42

SBI complained of the increased waiting time for cheque clearance since

there was shortage of manpower.

SBI faced flak not only for customer service but also for interest lost

on money transferred from various branches as delays in remittance of cash

snowballed to over five days with SBI too understaffed to clear transactions

in time. In normal cases, the transfer takes place on the same day or the next

day.

According to media reports, some of SBI’s problem centres were

Pune, Baroda, Surat, Panjim and, to a lesser extent, Jalandhar and

Jamshedpur. But one of the bank’s human resource executives claims that

there were no identified problem centres as such and that the media reports

were inaccurate. He concedes, however, that the VRS resulted in some

minor regional imbalances, but these were tackled by SBI by rotating the

administrative staff to various branches wherever there was a need to do so.

SBI’s manpower problems were shared by all public sector banks. State

Bank of India is not only the largest of the Indian Banks, but also it is the

biggest Institution at the Global level in terms of manpower employed. In

the period immediately before VRS implementation it employed 237504

officers and other employees. Through the application of VRS it has shed its

work force by 20784 (8.7%). Cadre-wise the position is as under.

43

Particulars Officers Clerical Subordinate Aggregate

Total Strength 60536 117184 59784 237504

Those opted

VRS

6694 11271 2819 20784

%age VRS of

Total Strength

11% 9.62% 4.72% 8.7%

However State Bank of Travancore is a subsidiary of SBI and is of

much smaller size. It has branches mainly spread in Kerala. The subsidiaries

of SBI implemented VRS subsequently after it was implemented by the SBI

and other Nationalised Banks. SBT had 13000 & odd number of employees

(inclusive of all cadres). It incurred an expenditure of Rs.57 Crores towards

compensation payment under VRS and relieved 915 employees, which is

approximately 7% of the staff-strength as detailed hereunder:

Particulars Officers Clerical Subordinate Aggregate

Total Strength 3150 7023 2964 13137

Those opted VRS 534 299 82 915

%age VRS of Total

Strength

16.96% 4.28% 2.77% 7%

SBI took a hit in its profits by charging VRS expenses to the tune of

Rs 8.8 bn in FY01. The bank's profits, excluding VRS, however jumped by

22%, in line.

44

During the year SBI implemented a VRS plan to cut its operating

costs and improve efficiency levels. The total cost of the scheme to the bank

was Rs 23 bn. In FY01 the bank had made a provision of Rs 8.8 bn and

planed to write off the balance expenditure equally over a period of four

years. SBI moved towards the right direction by implementing the VRS,

foraying into retail, technology up gradation plan and entering into the

insurance business. In future it was be however difficult for the bank to

operate at high margins considering the increasing competition and

improving quality of services provided by other banks. Also, the bank will

have to provide a higher amount as provisions for non performing assets, if

the economic and industrial activity witnesses further downtrend.

Departments like internal audit, concurrent audit, monitoring,

inspection of borrowers had hardly any staff, according to reports. It was

reported that employees working in branches that had a high workload went

on work-to-rule agitation, blaming the VRS for their problems. Analysts felt

that SBI would have to take serious steps to reorient its HRD policy to

restore employee confidence and retain its talented personnel. SBI had many

strong organizational strengths and an excellent training system, but due to

weak HR policies, it had lost its experts to its competitors.

The employees of almost all the new generation private sector banks

were former employees of SBI. The bank’s well-defined promotion policy

was systematically flouted by the framers themselves and, as a result,

employees with good track records were frequently sidelined. Many analysts

felt that SBI was not able to realize the critical importance of recognizing

inherent merit and rewarding the performers.

45

The above factors were cited as the major reasons for the success of

VRS in the officer cadres, who were reported to be demoralized and de-

motivated. The arbitrariness and insensitivity at the corporate level had dealt

a severe blow to the employees of the organization. What remained to be

seen was whether SBI would be able to reorganize its HRD policy and retain

its talented personnel.

46

CHAPTER VI. IMPLEMENTATION OF THE

SCHEME IN CANARA BANK

VI.I INTRODUCTION:

Widely known for customer centricity, Canara Bank was founded by

Shri Ammembal Subba Rao Pai, a great visionary and philanthropist, in July

1906, at Mangalore, then a small port in Karnataka. The Bank has gone

through the various phases of its growth trajectory over hundred years of its

existence. Growth of Canara Bank was phenomenal, especially after

nationalization in the year 1969, attaining the status of a national level player

in terms of geographical reach and clientele segments. Eighties was

characterized by business diversification for the Bank. In June 2006, the

Bank completed a century of operation in the Indian banking industry. The

eventful journey of the Bank has been characterized by several memorable

milestones. Today, Canara Bank occupies a premier position in the comity

47

of Indian banks. With an unbroken record of profits since its inception,

Canara Bank has several firsts to its credit.

VI.II VRS IMPLEMENTATION:

The VRS scheme of canara bank is not different from the rest of the

public sector banks in terms of the basic content of the benefit package, or

other terms offered. It had a very smooth VRS sail and granted it to almost

all of its applicants ranging between 15 and 22 per cent of the total staff

strength.

Canara Bank, has received an overwhelming response of around 8,500

applications to its voluntary retirement scheme that ended on January 31, has

permitted withdrawal of VRS applications till February 10.  The total

number of employees eligible for VRS were 47.834 and the employees who

opted for VRS were 8,500. Canara Bank proposes to acquire banks in

regions where its presence is not adequately felt at present.

48

COSTS TO BANKS:

All 26 banks Canara bank

Estimated Cost Rs. 5.93 lakh Rs. 450 Cr

Actual Cost Rs. 7490 cr Rs. 750 cr

``We have plans for synergical acquisition through mergers but we

will place the proposals before the board of directors of the bank before

going to the Government on this score', the Chairman and Managing

Director, Mr R. J. Kamath, has said.

Addressing presspersons at the knitwear town of Tirupur, Mr Kamath

hinted that Maharashtra and Gujarat where the presence of Canara Bank was

not strong were the target regions. `Acquisition in these States will bring

synergy to bank', he said.

The CMD who sought to underplay what he called `controversial

media reports' on Canara Bank's move to acquire the Dena Bank, denied that

he had stated that his bank was involved in acquiring Dena Bank. `The

Special Secretary, Banking Division, himself ha d clearly stated that the

Government favoured bank mergers and so, Canara Bank was not averse to

acquiring banks through mergers', he added.

49

With 450 branches in Tamil Nadu and 520 branches in Karnataka, the

bank already enjoys a strong presence in South and therefore any further

acquisitions in the region may not bring synergy to its operation.

As for the bank's proposed voluntary retirement scheme (VRS) for its

employees, Mr Kamath said that as against the authorisation given earlier by

the board to accept 5,000 VRS applications, the total number of applications

received was 8,500.

The board, scheduled to meet on February 20, will decide on whether

to accept all the VRS applications or not. If it chooses to accept all the

applications, the total outflow on account of VRS compensation will be Rs

750 crore as against the present pro jection of Rs 450 crore.

On the bank's performance, Mr Kamath said its operating profit for

the current year was expected to touch the Rs 1,250-crore mark and its net

profit would be around Rs 435 crore. Concerted efforts to reduce its non-

performing assets (NPA) level had paid dividends.

The bank would be able to reduce its NPA by Rs 1,000 crore this year

and as against 5.36 per cent last year; the NPA percentage would come

down to four per cent, he said.

50

CHAPTER VII. POST VRS SCENARIO

The banks implemented VRS with a view to enjoy all its advantages

but somewhere things didn’t went as per planned and because of this many

problems were faced by the bank management, customers and the existing

employees. Customer inconvenience was the least of the problems that

banks suffered. There were disgruntled employees throughout the industry.

Of course, this state of affairs was inevitable; even the best-planned VRS’s

has an impact on employee morale. But it is also true that the exercise had

left several bank managements dissatisfied with the results in business terms

too.

To be fair, the exercise cannot be written off as a rampant failure. To

start with, it’s the first of its kind on this scale. It was also a major move in

an industry in which employment was almost considered a sinecure. But the

problems it has thrown up hold important clues to what can go wrong when

corporations implement a golden handshake.

The State Bank of India, along with a number of other nationalized

banks, implemented a voluntary retirement scheme for its employees. A

large number of employees actually took advantage of this scheme and

sought premature retirement. In consequence, the overall employment of the

State Bank of India shrunk. The consequences, unfortunately, are only too 51

evident to those who use the bank. There is now significant understaffing,

and consequent overwork of the remaining employees, with obvious effects

on the service. Transactions – even simple matters such as withdrawing

money from an account - which earlier required a few minutes, can now take

up to an hour. There are usually crowds waiting at each counter, with more

waiting time and more mistakes.

The fault is not that of greater inefficiency of the remaining workers,

but that there are simply not enough people left to do all the required jobs

easily and efficiently. What is worse is that the remaining workers are now

not just overworked but harried and anxious. The same people, who earlier

would perform their functions pleasantly and smilingly, are now tensed,

rushed and even surly, as they struggle to meet the demands of increasingly

irritated customers.

Recently, two major multinational banks merged, in an example of

growing concentration of the world banking industry. Obviously, that meant

that the banks in India also had to merge. This entailed the closing of some

branches and the drastic pruning down of staff in others, again through a

Voluntary Retirement Scheme which has focused on getting rid of active

union members.

The consequence, even in this newly merged multinational bank, was

a significant deterioration in service. Not only have the number of

employees dwindled, but experienced and skilled workers had been replaced

with raw recruits who had yet to learn their work and were prone to many

more errors. Many of the bank’s customers found it extraordinary that a

major bank, which had always ensured great care in the details of its

52

transactions, was willing to live with such a situation – all in the name of

reducing staff in order to improve overall efficiency!

But for a whole range of services, both public and private, the

consumers of such services also lost from the process of reducing the

number of workers. There were real losses in terms of delays, reduced

capacity of the remaining workers to cope with the greater load, resulting

mistakes, and a more oppressive atmosphere in the workplace.

In fact, the only real benefit from such downsizing was usually be

found in the balance sheets of the companies, as they could show lower

labour costs and therefore possibly higher profits. This was what creates the

competitive pressure across an industry for other companies to follow suit,

and to try and reduce the number of their workers.

It is time to call the bluff of those who tried and make us believe that

downsizing increases efficiency. Instead, it is really a way of shortchanging

both workers and consumers, and increasing profits at the expense of

everyone else. The irony, of course, is that when all employers try this

approach, it leads to lower economic activity in general, and as a result, for

macroeconomic reasons, profits do not raise either!

According to many, the timing of the cut-off date for implementation

of the VRS gave no room for the management in most of the banks as they

were too busy with the annual closing of accounts as at the close of March

31. Most of the top management functionaries in banks were engaged in

statutory audit and finalisation of balance sheet within the timeframe

prescribed, with the approval of their Boards and the like.

The public sector banks in India today are in deep trouble as their bad

debts (NPAs) are assuming gigantic proportions with no signs of any serious

53

attempt to recover them. Add to this the unprecedented removal of

workforce through the back doors, by resort to VRS, CRS and such other

unfair schemes, and a gloomy picture emerges.

Explains a banking analyst: “Public sector banks have numerous

branches and the relocation of staff from one area to another was not as easy

as it seemed because the notice given to employees was too short.” Says a

former employee of the State Bank of Maharashtra, “There’s no doubt that

the VRS was mismanaged. It left all branches short on staff and managers

and the remaining staff frustrated.’’

Part of the problem had to do with the fact that in several cases, many

more people opted for VRS than the managements had bargained for. In

most banks, the management had not planned the replacement of the duties

of the existing staff.

The banks managed to achieve two major VRS objectives:

Removing surplus (including non-performers) and reducing

employee costs

A second objective was still to be met. VRS was supposed to level

the age profile.

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 Officers’ Association - to articulate

their case and request the government to reconsider applications. The

association also maintained that the SBI management “abysmally lacked the

human touch in its manpower planning and this resulted in indelible

54

functioning among its officers.” Eleven cases have been filed by these

employees against the bank. Says the HR executives at SBI, “It will take

some time to soothe the heartburn but through constant communication the

employees that were refused VRS, are being convinced that they were

needed and hence were not granted VRS.”

Says Khanna of BanknetIndia: “Usually in public sector banks, the

management has an interface with the employees, offering them a

counselling-cum-discussion session. But in this case, since a huge number of

employees were in the process of exit, this procedure was skipped.”

55

PRIMARY DATA

In order to find out the present thinking of the bank employees, I

conducted a survey by distributing questionnaire to bank employees from

STATE BANK OF INDIA and CANARA BANK. The survey size is 20 i.e.

10 employees each bank.

The questionnaire for the employees is as under-

56

A QUESTIONNAIRE FOR BANK EMLOYEES RELATING TO

VOLUNTARY RETIREMENT SCHEME:

BANK:AGE: SEX:QUALIFICATION: DESIGNATION:NO. OF YEARS SERVICE PROVIDED:

1. YOUR MONTHLY SALARY RANGES BETWEEN.. BELOW 20,000 20,000 TO 30,000 ABOVE 30,000

2. DEPENDANTS IN YOUR FAMILY….. NONE 2 TO 3 3 TO 5 MORE THAN FIVE

3. A BETTER OPTION FOR YOU… VRS CONTINUING THE JOB

4. YOUR EXPECTED AMOUNT FOR VRS

5. YOU WOULD PROBABLY UTILISE THE VRS AMOUNT FOR… INVESTMENTS OLD AGE SAVINGS FOR CHILDREN SETTING UP A BUSINESS

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FINDINGS

For a clear understanding of the collected and its systematic

representation the use of charts and diagrams will be done in order to

analyse the data.

Moving on with the question whether the bank employees will accept

or reject it, the following results were found…..

Accept Reject0

10

20

30

40

50

60

70

80

90

100

Series 1

The red bar represents the percentage of employees who would accept

the VRS offer and the blue bar represents those who would reject it.

Now, the red bar mostly comprised of the people between the age

group of 45 – 50 years. The amount that they expected to receive ranged

between Rs 2000000 to Rs 25000000.

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The employees who would accept the offer were asked as to where

they would invest their amount. Their replies are represented in the form of a

bar diagram.

0

5

10

15

20

25

30

35

40

INVESTMENTSOLD AGE SAVINGSFOR CHILDRENSETTING UP A BUSINESS

It can be clearly seen that the maximum employees would keep their

saving for their old age thus securing their future, and the least of them

would apply it in setting up a new business, while some would invest it in

setting up a new business and for their children.

Thus, it can be concluded saying that if given an option, not many

would opt for VRS and that the optees would be people nearing their retiring

age and would utilize their amount for their old age saving.

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SUGGESTIONS

If the VRS had landed the banks in a situation where the remaining

staff was found inadequate to carry on with the various functions of these

banks, it was necessary to implement the other ingredients of the VRS

package. The public sector banks in India have had the unenviable task of

completing a round of voluntary retirement of its employees. Most of the

bank customers may not be aware of the impact of the VRS (voluntary

retirement scheme) on the banks' ability to continue the tempo of customer

service. The customers were often found complaining about the service

provided to them, but has any of us, being the customer ever thought the

reason behind it. We as customers would never have experienced too many

employees in a bank, but in case of lack of service, have we ever thought

about the reason behind it or has the bank management ever thought the

exact reason, whether the service provided was better then or now. The only

problem was staff management and increased cost.

The cost of poor customer service could be solved by the

mechanization and the computerization that took place in the banking

industry two decades ago, and also the wayside ATMs (automatic teller

machines) we see today may loudly announces their ability to provide ample

service to the community. But, the fact is otherwise. May be, the service to 60

customers is not hindered so far. When the VRS was in the process of

implementation, all staff unions and even some banks opposed it on various

grounds. The unions opposed it as they never agreed with the view that

public sector banks have had excess flab. But, what made some bank

managements to come out with statements such as "we do not have excess

staff to shed", "we want to have a different scheme in our bank".

If the banks ever ask me the alternatives or solutions to VRS, I would

tell them…

Weed out uneconomic branches, either by closure where alternative

banking services are available to the public or merge them with

nearby branches. It is also worth considering the feasibility of taking

over such branches by other group banks like fully government owned

banks, State Bank group banks and the like.

Expedite the promotion process in all banks from clerical cadre to

officers' cadre which was one of the means suggested to meet the

shortfall in the office staff when the VRS was mooted.

Pursue vigorously the computerization process in all banks, Initiate

motivational policies and lay down career paths to staff.

Review training plans at all levels and workout short term strategies.

Implement the alternative recruitment machinery to the abolished

Banking Service Recruitment Boards (BSRBs) in individual banks.

Streamline and rationalize the systems and procedures in the banks to

meet the changing needs and expedite the process of privatization

already under way.

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The list may be endless. What is required is the will, and prompt

action. The focus is on customer service without adversely affecting the

back office function. The health of the banking system should be improved

without any letup in the standard of efficiency expected of a vital link in the

liberalization process which is to be furthered in the road map for achieving

global standards.

Thus if VRS was employed but proved to be a failure, implementation

of another policy correcting its consequences is not viable. Instead the VRS

should be revised and all the loopholes should be looked into at a national

level, then only a common solution to the problems of many such banks can

be solved.

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CONCLUSIONS

After a thorough research it can be concluded that If the VRS has

landed the banks in a situation where the remaining staff is found inadequate

to carry on with the various functions of these banks - both internal and to

the clientele - it is necessary to implement the other ingredients of the VRS

package such as redeployment, accelerated mechanization and

computerization, selected recruitment of specialized staff and closure of or

merger of uneconomic branches.

The scheme of VRS should convince the employees that the posts in

the organization have become redundant and not the person and the

organization still value the person. Since this process involves emotions and

feelings, every care must be taken by the management that the process must

be carried out in such a manner that it keeps the dignity of the employees but

at the same time achieves the objective in a tactful manner.

ANNEXURE

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APPLICATION FOR VOLUNTARY RETIREMENT SCHEME:

To---------------------------------------------------------------------------------------------------------------------------------------------

Sub: - Application for Voluntary Retirement under Scheme

notified vide Circular

No……………………………………….. Dated………………

Sir,

1. With reference to Circular no……………………………

dated…….......... on the above subject. I hereby opt for release

under the Voluntary Retirement Scheme.

2. I agree with the terms & conditions as contained in the aforesaid

circular.

3. I may kindly be relieved by ……………………….. In accordance

with the above Scheme and the various benefits as provided therein

may be paid to me on the date of release. My particulars as on date

are as under:

Name

Employee No.

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Father’s/Husband name

Date of Birth

Date of joining the Corporation

Total service in the Corporation in Completed years

Designation

Scale of Pay

Basic Pay

DA

Declared Home Town

Details of Family Members residing with me (along with date

of birth)

1. ……………………………………………

2. …………………………………………………

3. …………………………………………………

4. …………………………………………………

Present Posting

After retirement I wish to settle at :

Thanking You.

Yours faithfully

(Name & Signature of the employee)

Date:

Name, Designation, Addresses and Signatures of two Witnesses:

1. ……………………………………………

2. ……………………………………………

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Certified that I have neither applied nor I have the intention to apply for

employment in any Public Sector Enterprise/Government Organization after

Voluntary Retirement.

(Name & Designation of the employee)

Date:

FOR OFFICE USE

The Application of Sh./Smt/Km………………………………for release

under Voluntary Retirement Scheme has been verified. The application of

Sh./Smt./Km…………………………………. may be accepted/may not be

accepted for reasons specified on a separate sheet.*

Date …………

(Name/Designation and

Signature of Head of the

Department)

* Strike out whichever is not applicable.

Forwarded for acceptance through

Head of the Department.

Application of Sh. /Smt. /Km. ……………………...……………. for release

under VRS accepted/not accepted.*

CMD/Head of the project.

Date: ……………….

* strike out whichever is not applicable.

AN ARTICLE DATED 27 TH MAY 2004 STATES THE FOLLOWING:

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“The State Bank of India (SBI)

is likely to initiate a second round

of voluntary retirement scheme

(VRS) in the next few months.

This time the bank will be

targeting employees over the age

group of 55 years. It is

understood that the proposal will

be put up before the board for

approval.

The first round of VRS which was held about four years back was

also targeted employees of the same segment. Speaking to FE, a senior SBI

official said a final decision on the issue will be taken after the core banking

exercise which involves integrating the branches.

As per a rough estimate, there were over 2 lakh employees of which

about 60,000 were officers. SBI officials said that 10 per cent of the staff

was of 55 years and above. “Recruitment activity was at its highest during

1960s-end and early 70s. Therefore, there was a large number of employees

who had crossed 55 years of age,” a source added. SBI is likely to go ahead

with the VRS plan independently.

Meanwhile, the board is also likely to study the merger proposal of

the bank with its seven associate banks. The associate banks of SBI include

the State Bank of Patiala, Mysore, Hyderabad, Travancore and Saurashtra

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among others. “We will seriously look into the proposal and chalk a feasible

plan to facilitate the merger.

The merger is the only solution as they cannot co-exist as competitors in the

market, particularly in view of globalisation and foreign competition,” a

senior finance ministry official said.

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REFERENCES

WEBLIOGRAPHY

www.hinduonnet.com

www.thehindubusinessline.com

www.merinews.com

www.icmrindia.com

www.planningcommission.nic.in

www.banknetindia.com

www.financialexpress.com

BIBLIOGRAPHY

Banking Sector and Human Resources: Changing Scenario

- By T. Sreenivas

Legal Aspects of Business

- By Pathak

DATA COLLECTION FROM EMPLOYEES OF:

State Bank of India, Thane, (Samta Nagar).

Canara Bank, Mulund (West).

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