VRS in Public Sector Banks

VRS in public sector banks
I
n the present globalised scenario, right sizing of the
manpower employed in an organisation 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 improve the
performance of the organisation. 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.
In India, the Industrial Disputes Act, 1947 puts restrictions on

employers in the matter of reducing excess staff by retrenchment,
by closures of establishment and the retrenchment process
involved lot of legalities and complex procedures. Also, any plans
of retrenchment and reduction of staff and workforce are
subjected to strong opposition by trade unions. Hence, VRS was
1
introduced as an alternative legal solution to solve this problem. It

allowed employers including those in the government
undertakings, to offer voluntary retirement schemes to off-load the
surplus manpower and no pressure as such was put on any
employee to exit. The voluntary retirement schemes were also not
subjected to not vehement opposition by the Unions, because the
very nature of its being voluntary and not using any compulsion. It
was introduced in both the public and private sectors. Public
sector undertakings, however needs to obtain prior
approval of the government before offering and
implementing the VRS.
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.
2
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
3
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 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. 5
lakhs, 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
4
scheme shall not be eligible in future for employment in

the establishment.
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.
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• The date of acceptance of VRS by the competent authority will
be treated as date of voluntary retirement.
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
more.
• 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 or communication to employees 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.
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• 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.
The challenges in implementing employees Exit

• The reasons and need to introduce VRS should be discussed
with all management staff including top management.

• 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 down
sizing - both social and psychological.
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• Motivate employees who will stay with the company, remove
their apprehensions and fears, if any.

• 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.
Merits 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.
Demerits of VRS
To a certain extent it creates fear, a sense of uncertainty among
employees. Sometimes the severance costs are heavy and
8
outweighs the possible gains. Trade unions generally protest the

operation of such schemes and may cause disturbance in normal
operations. Some of the good, capable and competent employees
may also apply for separation which may cause embarrassment to
the managements.
It is found in practice that organisations 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
managements have really made the schemes very attractive by
making it “Golden Hand Shake.”
It is incumbent on the establishments that they do not

recruit similar staff immediately after the implementation
of voluntary retirement scheme. Such recruitment, in spirit
and essence is contrary to the principle of staff being excessive or
surplus. In case disciplinary action is pending against an
employee, who has sought Voluntary Retirement, the Disciplinary
Authority shall, after considering all facts, convey to the
Competent Authority whether the request of the employee should
be accepted or not. In case the Disciplinary Authority decides that
the request of such an employee for Voluntary Retirement be not
accepted, the same shall be communicated to the employee in
writing and he shall have a right to make an appeal as provided
under section 9 (v).
9
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 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.
10
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.
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/re-
payment 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.
12
• 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 to the person nominated to receive such
dues.
• 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 (or his
nominee in case of death). 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.
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 for the
purposes of section 10( 10C ) of the Income-tax Act have
been laid down in the rule 2BA of the Income-tax Rules.
13
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 (by whatever name called),
including workers and executives of the company
excepting Directors of the company
•The scheme of voluntary retirement has been drawn to result
in overall reduction in the existing strength of the employees
of the company
•The vacancy caused by voluntary retirement is not to be filled
up, nor the retiring employee is to be employed in another
company or concern belonging to the same management
•The amount receivable on account of voluntary retirement of
the employees, does not exceed the amount equivalent to one
and one-half months 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, and
•The employee has not availed in the past the benefit of any
other voluntary retirement scheme.
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Application for voluntary retirement scheme
To
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
Sub:- Application for Voluntary Retirement under Scheme

notified vide Circular
No……………………………………….. Dated………………
15
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.
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. …………………………………………………
16
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. ……………………………………………………
Certified that I have neither applied nor I have the intention to
apply for employment in any
Public Sector Enterprise/Governemtn Organization after Voluntary
Retirement.
( )
Name & Designation of the employee.
Date:
FOR OFFICIAL 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.
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Forwarded for acceptance through
Head of the Deptt.
Application of Sh./Smt./Km. ……………………...……………. for

release under VRS
accepted/not accepted.*
CMD/Head of the project.
Date : ……………….
* strike out whichever is not applicable.
A
s 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. According to Finance Ministry on the basis of
business per employee (BPE) of Rs. 100 lakhs, there were 59,338
excess employees in 12 nationalised banks, while based on a BPE
of Rs. 125 lakhs the number shot up to 1,77,405. On a
18
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

unionised 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.
UNDER severe pressure from the staff of Corporation Bank to

throw open an exit route, it considered the option of approaching
to the Government to devise a special Voluntary Retirement
Scheme (VRS) to allow only a highly selective offer.
The special scheme seeked to limit the offer to only those sections
of the staff that were identified as surplus after a thorough in-
house exercise on the bank's human resource requirement.
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
19
officer and clerical grades, on account of its expansion

plans drawn up with Life Insurance Corporation of India
(LIC).
According to sources, the bank had just completed the recruitment

process for taking on its rolls an additional 125 officers and 160
clerical staff. The persons recruited will be deployed at the large
number of extension counters that the bank proposes to open
within the premises offered by LIC.
"We are still unsure whether it is proper to offer a general VRS for
the staff while a drive to recruit more has been taken up,"
Corporation Bank officials said.
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 Banks'

Association (IBA) for the PSU banks, the offer could be availed by
all who 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 specialised
skills that the bank might find difficult to replace.
20
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.
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
21,050 crore. By 2001-02, staff costs had dropped to Rs 18,959

crore.
21500
21000
20500
20000
19500
19000
18500
18000
17500
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. The scheme has been envisaged to assist
banks in their efforts to optimise use of human resource and
achieve a balanced age and skills profile in tune with their
business strategies.
VRS was implemented by 26 out of 27 public sector banks in 2000-

2001. 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.
22
About 80 per cent of the number 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.
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
23
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, agrees with Mr.

Vava when he says, "With computerised systems having been
installed, we realised we were carrying excess flab that was
adversely affecting our bottom line. Therefore we decided to
implement VRS." Mr Nayak disclosed, his bank 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.
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.
24
Despite the fact that banks incurred huge capital costs and cash
outflows during the ongoing VRS scheme, they simultaneously
saved a lot of recurring costs and cash outflows which positively
affected their profits and improved profitability.
Paresh Kothari, an analyst on the banking sector with

Khandwala Securities said, "Impact of VRS has already been
discounted and factored in the current stock prices by the
market but in the long run the overall impact on the share
prices will be very positive." He said costs will come down and
profits will go up, both bullish factors for stock markets.
Clearly, cost cutting is set to have its impact on banks' profits as

well as profitability and it is only a matter of time before the frenzy
for bank shares returns to the stock markets.
Said Mr Vava, of Punjab National Bank, "Bank employees who

have availed of VRS are highly educated and experienced and
have taken into account all consequences of opting for an early
retirement." Agrees NS Nayak of Bank of India, "Bank employees
are aware of the risks of early retirement but they are sufficiently
educated and experienced not to make any serious mistakes"
However, Shankar Rele, director, Dash Management Services Pvt.
Ltd. thinks otherwise. Talking to a business magazine he said,
"With a large number of employees expected to be freed from
their regular jobs over a period of time through VRS, there is
25
bound to be an excess supply side situation in the job market.

These people will have to find new avenues for themselves and to
that extent this could lead to a social problem."
Mr Rele may well have a point. There have been many instances in
the past when people, with huge sums of money in hand have
ended up losers because of their inability to manage the same
well. It is a well-known fact that a lot of such sums have been lost
in the stock markets.
Mr Rele launched a project whereby he tried to help those who had

availed VRS to find alternate employment opportunities. He used
his association with the insurance, bank and the IT sectors to help
such employee’s alternative employment. He also provided
adequate training to the employees in new areas where required,
with the help of psychologists.
The salient features
Eligibility
26
• 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.
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 months service is left, whichever is
less
Other Benefits
27
• 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.
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.
•Sanction of VRS and any new recruitment should only be in
accordance with the manpower plan.
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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 any
other source.
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.
To minimise the immediate impact on banks, the scheme allowed

them the stagger the payments in two instalments, with a
minimum of 50 per cent of the amount to be paid in cash
29
immediately. The remaining payment can be paid within six

months either in cash or in the form of bonds.
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.
The ICAI pointed out that many public sector enterprises as well as
banks who implemented VRS had to make payments of huge
amount to the employees who opted for VRS. ``There will be a
large outflow of cash and already banks are requesting the Central
Government to provide them with necessary funds for the purpose
of implementing VRS. It is logical therefore to allow the entire
amounts paid on such schemes as an allowable deduction for the
purpose of computing income of the respective enterprises'', the
ICAI said in a post-Budget memorandum.
The Finance Bill 2001 proposed a new Section 35DDA which

provides for amortisation of expenditure incurred over a period of
five years. Accordingly, such expenditure is deductible in five
equal installments.
30
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 unamortised portions of such payments .
On the proposed changes in the due dates for filing of income tax
returns, the ICAI has suggested that for all those cases where no
statutory audit is required the returns may be filed by July 31 and
for those cases where statutory audit is required the returns may
be filed by October 31 for Assessment Year 2001-02. For
subsequent years, the institute recommended that the date for
those cases where statutory audit is required may be fixed as
September 30.
As regards the proposed provisions which would bring the large

amounts of non-competing monies received by employees in to
the tax net, the institute has pointed out that `where the assessee
receives such amount before joining employment, the charging
section 15 may not be able to cover such a situation in the
absence of employer-employee relationship''. ICAI has urged the
Government to address this issue through suitable changes.
But when they were planning to write off the VRS expenditure over
a few years, an expert opinion provided by the Institute of
Chartered Accountants of India (August 2000) proved to be a
proverbial spoke in the wheels. The opinion stated that out of
31
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.
For the banks, it was a strict `no no' as it would impact their profits
substantially. Hence they wanted their regulator to prescribe an
accounting treatment so as to take precedence over the opinion
given. The regulator readily obliged and through its circular (dated
January 30, 2001), allowed the banks to defray the entire
component of the VRS package including outflows on account of
gratuity and leave encashment to be treated as deferred revenue
over a period five year period.
Sensing that the tax deductibility on account of VRS would be

acceptable to the bankers if provided over a period (even though
the expenditure could be straightway claimed as revenue), the
Government for its part brought in Section 35 DDA into the Act
which provided tax deductibility over five years.
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 at the time of
retirement was exempt to the extent of Rs.5 lakhs. This
32
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. Incidentally, the finance ministry stayed away from the
entire exercise. The Indian Banks' Association devised the formula,
which was accepted by the industry after a formal vetting of the
banking division of the ministry.
Employees over 45 years of age were eligible for the 'generous'

scheme which offered two months' salary for every year
completed or the residual service period, which ever is lower.
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.
At Punjab National Bank, for instance, business per employee has

risen by as much as 34 per cent to Rs 14 million in the last one
year. PNB chairman SS Kohli, who is also the chairman of the
Indian Banks' Association, attributes the growth in BPE to the
33
success of the separation scheme. Together, the 27 public sector

banks showed a 26 per cent growth in BPE, which rose to Rs 15
million at the end of March 2001 as against Rs 12 million in 1999-
2000.
M
any 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.
34
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 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.
The Madras High Court had held that "payments made to

employees by way of gratuity, bonus, retrenchment compensation
or compensation for termination of service, whether under
compulsion of statute or voluntarily, cannot be said to be
unconnected with business, or as not being commercially
expedient, so long as the quantum of the payment is reasonable,
having regard to all circumstances relevant to the business
enterprise. Such payments have ordinarily to be regarded as
payments made to facilitate the carrying on of the business of the
assessee".
35
The Madras High Court on the aspect of VRS in had held, "When
the payment is made for the purpose of retrenchment of workers it
was for the purpose of reducing the staff and to bring about a
reduction in the wage bill as well. Therefore these were matters of
management pertaining to business considerations and
expediency and the expenditure incurred by the assessee in this
regard was for the purpose of business and also with a view to
maintaining good relationship with the labour and that the
expenditure had to be considered as having been laid out wholly
and exclusively for business purposes of the assessee. Therefore
the sum paid under VRS was deductible."
It has also 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
36
advantage to the tax payers. All said and done, this circular was
on shaky grounds.
There were enough case laws which held that the circulars cannot
take away what is legitimately available under the law. There were
also decisions which stated that the Circulars from CBDT would not
bind the courts or the tax payers. Again various courts including
the Supreme Court maintained that circulars cannot preempt a
judicial interpretation. Armed with the above, the banks were not
too worried about the CBDT's circulars
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
installments and in some cases through issue of bonds. It was then
that all hell broke loose.
Since the banks paid the compensation in instalments, the

exemption under Section 10 (10C) of the Income-tax Act 1961 was
restricted to first such annual instalment and the retirees were
37
denied the promised Rs. 5 lakhs exemption. To a great extent, the

instalments which followed had to suffer tax with no exemption
whatsoever.
Secondly, in some cases the tax department argued that the

annual instalments 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 meagre 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
38
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 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:
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;
39
• 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;
• 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 or voluntary
separation 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 or
superannuation.
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
40
voluntary retirement he has to consider the taxability of all sums

received. Generally the proceeds fall under the following
categories:
(i) Gratuity:
In case of emloyees of government and employees of local

authorities, 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).
(ii) 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. Voluntary retirement shall be treated as retirement
otherwise.
(iii) Provident fund:
Payment received from provident fund shall be exempt under

Section 10(11) of the Income Tax Act.
41
(iv) 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.
42
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.
43
Recently the Madras High Court decided in favour of the assessee,

and held that relief under Section 89(1) is available to the
employees opting for voluntary retirement, over and above the
exemption of Rs 5 lakh under Section 10(10C). The Madras High
Court - held that if an employee receives compensation at the
44
time of resignation, the amount could be regarded as salary, and

the assessee would be entitled to the relief provided under Section
89. This principle rendered in the case of resignation would apply
as much to the case of voluntary retirement of an employee from
service. Further, the Income Tax Appellate Tribunal - upheld the
same contention, and held that relief under Section 89 is available
over and above Rs 5-lakh exemption under Section 10(10C).
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 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 utilises the benefits available

under the Income Tax Act.
45
Investment of VRS amount
W
ith the advent of the Senior Citizens Savings Scheme,
those opting for retirement, voluntary or otherwise,
suddenly had a window of opportunity.
Basically, the SCSS are open for those opting for retirement
provided they are 55 years of age. 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..
Let us take a live case of one such person, whose particulars are
provided in the table.
46
TABLE
45 years 7 months
(a) Age
Service put in 26 years 2 months Analysis
Residual service 14 years 5 months
Current gross pay Rs 15,668 The ex-gratia is exempt up to Rs
500,000.Assuming that the rest of
Entitlement for VRS Rs 745,308 the amount is subject to tax at the
Ex gratia highest rate of 33.66 per cent, the
PF Rs 346,910
Leave encashment Rs 151,050 amount remaining in hand works
Gratuity Rs 299,565
Pension commutation Rs 114,328 out at Rs 662,737.
Total Rs 16,57,161
Monthly pension Rs 6,138
• [745,308 - 500,000 =
245,308]
• [33.66% of 245,308 = 82,571]
• [745,308 - 82,571 = 662,737]
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.
47
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. Isn't it strange that a person's
income can be greater when he isn't working than when he is?
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.
48
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:
Time is money
We know about the time value of money. But have we considered

the money value of time? This is a very important aspect,
neglected by many. Money has time value that is expressed in
terms of interest.
Similarly, time has money value. Unfortunately, this cannot be

accurately quantified and will heavily depend upon the future
events such as getting another job, starting a business, pursuing a
rewarding hobby, etc.
49
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 an year 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.
50
MANAGEMENT VS EMLOYEES
Various bank unions have not been in favour of VRS being

implemented but they could do little because the amount of
money offered lured away their colleagues like honey attracts
bees. Said Mr Shanbhag, general secretary of PNB bank
union, "We are not happy. We had all along been opposing VRS
because we feel that our colleagues could face problems post VRS.
However we could do little because the government enforced the
scheme and employees lapped up huge sums of money they were
offered to them by the managements." Mr Shanbhag said post
VRS, replacements have been slow to come by, which exerts
additional pressure on remaining employees.
Bank managements have become jittery over the impact of

voluntary retirement schemes on the officer cadre, with trends
pointing to a depletion in rural branches, the north-east and even
in metros like Mumbai. Several members of the Indian Banks
Association (IBA) are now worried that the voluntary retirement
schemes announced by a host of banks will leave them with a
skewed staff-officers ratio.
51
According to a sample survey of the VRS applicants at various

public sector banks, over 80 per cent are officers. At some banks,
it is 85 per cent. The survey has also pointed out that over 80 per
cent are from officers posted at north eastern states and in rural
branches.
"Now, if a bank approves the VRS applications of even half

the number of officer-applicants, it will be forced to close
down a substantial number of its rural and north east
branches," pointed out an associate of IBA.
Around 15 public sector commercial banks have so far announced

VRS. Among them are Allahabad Bank, Bank of India, Bank of
Baroda, Bank of Maharashtra, Canara Bank, Dena Bank, Indian
Bank, Oriental Bank of Commerce, Punjab National Bank,
Syndicate Bank, Uco Bank and United Bank of India. Meanwhile,
the United Forum of Bank Unions, a group of nine major trade
unions, has done its own survey of the factors attracting officers to
the VRS.
The UFBU's co-convenor, Mr Ashoke Dutta, told The Financial

Express that the Union government had done a very effective
silent campaign to the effect that the retirement age of PSU
officers may be lowered to 58 years from 60 now. The government
cannot bring down staffs' retirement age, since they have been
52
appointed through agreements that specify a retirement age of 60

years. But the officers are appointed via notifications, with the
government retaining the option to lower or increase the
retirement age.
According to Mr Dutta, in such a situation, the officers find a VRS

the most suitable option. Officers opting for a VRS get benefits on
the basis of a retirement age of 60. Officers who stay on may lose
two years of entitlements in case the retirement age is lowered, Mr
Dutta pointed out.
Another reason for the popularity of the VRS with officers is that
their actions are subject to scrutiny by outside agencies like the
Central Bureau of Investigation (CBI). The staff members' actions
are out of the purview of the CBI.
"So officers prefer to opt for a VRS at the first chance

rather than risking their service for some more years. In
fact, it has been the fear psychosis that has prompted the
officers to go for the VRS," Mr Dutta added.
These factor have played an especially important role at banks like

United Bank of India, Uco Bank and Indian Bank, the so-called
weak banks. Officers of these three banks were uncertain about
their future and therefore rushed for the VRS.
53
According to the president of the All India State Bank of India

Officers' Federation, Mr BB Das, apart from north east and rural
India, the number of VRS applications among the officers has been
quite high in Mumbai and Bangalore. "This is because the job
prospects in these two cities are bright and the VRS has paved the
way from the PSU banks to lose their cream to private
organisations," he said. He also said that the officers - unlike the
staff members - are liable to be transferred any time and this
factor has also played a role in the VRS issue.
STATE BANK OF INDIA EMPLOYEES
While the voluntary retirement scheme (VRS) package of State

Bank of India (SBI) benefited about 22,000 employees of the bank,
a significant number of officers about 11,000 were the dejected lot
since their applications for VRS package was rejected by the
management.
About 11,000 SBI employees of the officer cadre were not

given the package despite making an application. They
then formed an association _ SBIVRS Optee Officers'
54
Association _ to articulate their case and request the

management and the Government to consider their
applications.
The President of the SBIVRS Optee Officers Association,

Hyderabad, Mr Y.L. Marianna, told Business Line that apart from
various initiatives, there was no other option but to go to the court
as all their efforts to hold parleys and address the problem did not
materialise.'' Mr Marianna said that the congregation resolved to
go ahead with its action plan to achieve VRS to all its member
applicants who had been denied the package by the SBI
management on the ground that they were below 55 years of age.
The association maintained that the SBI management abysmally

lacked human touch in its manpower planning and this resulted in
indelible frustration among its officers community. This
accumulated frustration and identity crisis had resulted in many of
the employees opting for the VRS package.
They opined that SBI did not live up to its image of being the
largest bank, while major banks, including Punjab National Bank,
Bank of India, Canara Bank, Syndicate Bank, Andhra Bank and
Dena Bank, 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.
55
The association maintained that the SBI extended the VRS

package to barely about 10 per cent of the staff working to about
22,000 out of 2,33,000 employees. Of about 56,000 in the officer
cadre, about 18,000 had opted for the VRS. However, the bank
appro ved the package for about 7,000 officers only, Mr. Marianna
maintained.
While some of the loss-making banks had managed to come up

with attractive VRS packages, the association noted that SBI and
Bank of Maharashtra were among the two major banks which did
not live up to their true status and limited the percentage of
optees.
The aggrieved members of the association instituted suits

in several courts across the country. The management had
to take stock of the interim orders of the Guwahati and
Bangalore High Courts which came in favour of the

employees, the association said.
While the association resolved to take up the matter with the

Government, it expressed a view that the trade unions, have
always drawn support from the employees They said that the
threat of bringing down the retirement age from 60 years to 58
years was putting a lot of pressure on senior bank officials to opt
for the scheme.
56
In December 2000, SBI had formed a joint venture with the

French insurance company Cardiff, for entering the life
insurance business. The unions questioned the logic
behind diversifying the business and cutting down the
staff strength. They argued that this move would
significantly increase workforce burden and, consequently,
adversely affect customer service.
Justice Alok Chakraborty of the Calcutta High Court

has dismissed a writ petition filed by the SBI (VRS)
Optee Officers Action Group (Bengal), challenging the
decision of the bank authority not to accept the
voluntary retirement scheme (VRS) of all the officers
of the bank.
In the petition it was alleged that the bank authority illegally

had not accepted the VRS for all the officers and that it
rejected the prayer for VRS without showing any reason.
The bank stated that if all the employees take VRS, the
functioning of the bank will collapse and that it is not in a
position to face the financial burden of over Rs 500 crore to
meet the claim of the writ petitioners.
CORPORATION BANK EMPLOYEES
57
When the option for VRS was granted to the public sector banks,
all the banks except corporation bank accepted it. Officers of the
Corporation Bank were set to write a new chapter in industrial
relations history by demanding an exit policy in the bank. They
went on a one-day token strike on March 30 2001 to press for their
demand for the introduction of a voluntary retirement scheme.
These officers were left out when the public sector banking
industry introduced the first ever VRS in 2000 which saw 91,970
bank employees accepting VRS.
This accounted for 11 per cent of the total number of bank

employees. Except for Corporation Bank, the entire industry (26
banks) introduced the scheme in 2000 and around 15 per cent of
the total work force or 1,26,280 employees had applied for VRS.
Corporation Bank appointed a committee of executives to look into

the unions' VRS demand. The committee - which was assessing
the manpower requirement of the bank - submitted its report to
the board of the bank in May 2001.
58
Corporation Bank had an employee strength of close to 11,000 out

of which 8,315 were officers. The management was resisting the
demand for the introduction of a VRS as the bank needed a bigger
work force to support its expansion plans. In fact, the bank was in
the process of recruiting around 600 officers and clerks over the
next few months.
Industry sources, however, indicated that the bank management

was then open to the idea of a VRS - with some riders.
BANK OF BARODA
On the same day (March 30), Bank of Baroda employees too went
on a striking work for an altogether different reason. Four
employees' associations (All-India Bank of Baroda Officers'
Association, All- India Bank of Baroda Employees'
Federation, All-India Bank of Baroda Employees' Co-
ordination Committee & Eastern Regional Council of Bank
of Baroda Employees' Association) called for a strike
protesting the bank's move to rope in a consultancy firm
59
to draw up a business strategy. Initially, the firm was

appointed to chalk out an infotech strategy only.
This was just the beginning. PSU banks needed to

implement at least another round of VRS to reach a
respectable level of employee productivity.
60
H
istory of VRS up to the date of implementation by the
respective PSBs, which commenced on 01.09.2000, was
common for all the banks. This was because the
initiative for action was with the Government of India, Finance
Ministry and the environment that affected banks was externally
oriented creating nearly identical problems for all the banks, the
difference being only in magnitude. The incidence of individual
banks scheme became visible only after the initiative was shifted
to the respective banks to implement the scheme. In other words
the difference in VRS between bank 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 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
61
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.
Though SBI had 9,000 branches, a mere 22% of those (1935

branches) were connected through Internet. SBI’s net profit per
62
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.
TABLE I
A COMPARISON BETWEEN SBI & SOME NPBs
PROFIT
PER
NPAs/NET
BANK EMPLOYE
ADVANCES
E (Rs in
Million)
SBI 7.18% 0.43
HDFC 0.77% 0.96
UTI BANK 4.71% 0.69
ICICI BANK 1.53% 0.78
GTB 0.87% 1.2
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
63
portion of the back-office staff had become redundant after the

computerization of banks. To protect its business and 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 over all cost cutting
initiative.
SBI faced a lot of protest against VRS from its employees due to
varying reasons. Inspite 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
64
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
behavioural sciences. Technical training is also a
disqualification - applying to those trained in computer or
information technology related areas at specialised
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
65
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 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.
66
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.
Particulars Officers Clerical Subordinate Aggregate

Total Strength 60536 117184 59784 237504
Those opted VRS 6694 11271 2819 20784
%age VRS to 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
67
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 to Total Strength 16.96% 4.28% 2.77% /TD>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..
(Rs m) FY00 FY01 Change 4QFY00 4QFY01 Change

Interest Income 222,009 260,034 17.1% 60,758 74,446 22.5%
Other Income 35,693 40,178 12.6% 11,322 14,782 30.6%
Interest Expenditure 152,726 177,556 16.3% 38,184 50,390 32.0%
Operating Profit (EBDIT) 69,284 82,478 19.0% 22,574 24,056 6.6%
Operating Profit Margin (%) 31.2% 31.7% 37.2% 32.3%
Other Expenditure 62,952 74,156 17.8% 19,008 24,319 27.9%
Profit before Tax 42,025 48,500 15.4% 14,888 14,518 -2.5%
Provisions & Contingencies 11,725 13,912 18.7% 718 -1,588
Tax 9,785 9,714 -0.7% 4,684 4,107 -12.3%
Profit after Tax/(Loss) 20,516 24,874 21.2% 9,486 12,000 26.5%
Provision for VRS - 8,832 - 8,832 -
Net Profit 20,516 16,043 -21.8% 9,486 3,168 -66.6%
Net profit margin (%) 9.2% 9.6% 15.6% 16.1%
No. of Shares (eoy) 526 526 526 526
Diluted Earnings per share* 39.0 30.5 72.1 24.1
P/E (at current price) 7.5 9.5
*(annualized)
68
SBI's topline grew by an impressive 23% in the fourth quarter of

the year. However margins were depressed and operating
expenses increased sharply. A 480 basis points drop in operating
margins in 4QFY01 could be attributed to the inability of the bank
to sustain yield on advances after a cut in deposit rates. ?
The cost to income ratio of the bank was also higher at 63% in
4QFY01 (56% in 4QFY00). But if we were to exclude an amount of
Rs 4.4 bn written off towards the one-time issue expenses of India
Millennium Deposits (to be redeemed at the end of five years, in
2005-06), the ratio declined to 57% in FY01 from 60% in FY00.
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 upgradation 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,
69
if the economic and industrial activity witnesses further

downtrend.
According to industry watchers, by 2010, the entire SBI

staff recruited between mid 1960 and 1980 would retire.
As a result, SBI would not have sufficient manpower to
manage over 9000 of its branches.
TABLE
CHANGE IN SBI’s STAFF STRENGTH
31-03-01 31-03-00 % change

Officers 52,558 59,474 -11.63%
Clerical 103,993 115,424 -9.90%
Subordinate 53,729 58,535 -8.21%
Total 210,280 233,433 -9.92%
In the post-VRS scenario, SBI planned to merge 440 loss-making

branches and announced redeploy additional administrative
manpower (resulting from the merger of loss-making branches) to
frontline banking jobs. SBI also planned to reduce its regional
offices from 10 to 1 or 2 in each circle. In August 2001, it was
reported that a single officer had to take charge of 3 or 4 branches
as the daily concurrent audit got affected.
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,
70
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.
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.
71
An article dated 27th may 2004 states the following..
“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 among others. “We will seriously look
72
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
UCO BANK
T
he board of directors of UCO Bank decided that an officer
may seek voluntary retirement from the service of the
bank if he had completed 20 years of service in the bank,
or attained the age of 50 years, or if he become physically or
mentally incapacitated in such a manner that he is not able to
discharge his duties in the bank.
The provision to regulation 19 of the United Commercial Bank

(Officers) Service Regulations, 1979, reads ``provided also that
nothing in this regulation shall be deemed to preclude an officer
employee from retiring earlier pursuant to the option exercised by
him in accordance with the rules of the Bank''.
73
An officer can seek voluntary retirement from the bank instead of

resigning basically for the following two reasons: If he resigns, all
leave to his credit lapses. However, in case of voluntary
retirement, he is deemed eligible, in the United Commercial Bank
(Officers) Service Regulation, 1979, to be paid a sum equivalent to
the emoluments of any period of privilege leave that he had
accumulated.
If he retires voluntarily, he is, as provided in Regulation 43 of the

UCO Bank (Officers) Service Regulations, eligible to claim
travelling allowance, baggage and other expenses for himself and
his family as on transfer from the last station at which he is posted
to the place where he proposes to settle down on retirement.
This facility is not available in case of resignation of an employee

of the UCO Bank. The procedure and conditions for voluntary
retirement from the bank's service as approved by the board of
directors: The application and relevant documents for voluntary
retirement from the service of the bank shall be, in case of officers
working in divisions, routed through the respective divisional
offices. In case of officers posted at the head office, such
applications for voluntary retirement shall be routed through the
assistant general manager of the concerned department.
The VRS can also be availed under extraordinary circumstances,

which are within the satisfaction of the bank, compelling an officer
74
to seek voluntary retirement from the bank's services. However, in

such a case, the officer must have completed at least 15 years of
service in the bank.
An application seeking voluntary retirement shall be made by an

officer in writing to the competent authority not less than three
months prior to the date from which he seeks retirement. The
application shall be supported by the relevant documents
wherever required.
In appropriate cases, the competent authority may, if he is fully

satisfied, reduce or waive altogether the period of three months
required for submission of application. It shall be supported by the
relevant documents. It shall be open to the competent authority to
withhold permission to an officer under suspension who seeks the
voluntary retirement scheme.
The officer seeking voluntary retirement from the service of the

bank shall give an undertaking not to take up any employment for
a minimum period of two years from the date of such retirement
without prior consent of the bank. Claims with regard to gratuity
and provident fund of an officer permitted to retire voluntarily shall
be settled as per the rules relating to it.
Central Bank of India
75
It launched its voluntary retirement scheme (VRS) for a period of

15 days commencing on February 22 to March 8, 2001. The VRS
payable to the extent of 50 per cent in cash and the balance 50
per cent in the form of bond.
Bank of Maharashtra
It accepted applications of 2,000 VRS optees 800 officers and

1,200 class III and IV employees. About 2,700 employees of a total
of about 16,000 had opted for the scheme. VRS costed it over Rs
200 crore and reduced the annual wage bill by about Rs 56 crore.
Andhra Bank
It paid around Rs 160 crore in cash towards the voluntary

retirement scheme (VRS) of its employees, as against a
76
combination of cash and debentures issued by some public sector

banks. It received as many as 1,750 applications from its staff for
the VRS.
Bank of India (BoI)
They embarked on a major organisational recast exercise. After

the launch of the voluntary retirement scheme (VRS) which was
opted by 7,780 employees , the bank was set to abolish one tier
(zonal offices) from its four-tier organisational structure. The bank
now has three tiers -- branch offices, regional offices and head
office.
Canara Bank
77
They received an overwhelming response of around 8,500

applications to its voluntary retirement scheme that ended on
January 31 2000.
SECOND ROUND OF VRS
‘’IN a bid to further rationalise staff strength, the Government is
considering a second round voluntary retirement schemes (VRS)

for public sector banks. Some banks have asked for a second
round of VRS. It is under examination,'' said Ms Vineeta Rai,
Secretary, Banking and Insurance, while addressing an
international seminar on banking, organised by Indian Institute of
Bankers here. The first round of VRS helped banks reduce
manpower by 12-15 per cent.
`We have not reached the optimum,'' she said. The public sector
banks were able to bring down staff strength by over 1,00,000.
78
Many banks had said large manpower was putting `strain' on the
expenditure and was affecting their profitability, Ms Rai said.
‘`Banks have been asked to undertake manpower planning and
each bank has to assess its own requirements,'' Ms Rai said
declining to give any time frame for yet another round of VRS.
She also admitted that after first VRS, the vacancies were
filled up by promoting the existing staff with relaxation in
the norms, which had negated the purpose of VRS''. Ms Rai
said the need of the hour for the banking industry was to address
the issues of right size, right attitude and right skills.
BUT The second round of voluntary retirement scheme for public

sector bank employees is expected to be delayed for a while with
the government planning to link it to the wage settlement
negotiations.This is in contrast to the government's earlier stand
of letting banks decide on the introduction of the scheme targeted
at segments.
Additionally, the employees unions have proposed that the banks

should also give the employees a second chance to opt for a
pension scheme.A bank chief said the Indian Banks Association
had sent a draft pension scheme to the finance ministry.
Banks are, however, divided on the issue because some of the

bankers are of the opinion that the pension bill will outstrip their
wage bills over the next 5-6 years.On the other hand, some
79
bankers were in favour of the proposal because in the VRS that

was introduced by all public sector banks in 2001, barring the
Corporation Bank, a majority of the optees were accounted for
employees who had decided to go for a pension when the offer
was made to them in the mid-eighties.
Officials said a decision would be taken over the next few days.
They, however, said the second round of VRS could only be offered
around next year because the wage negotiations had just started
and the process was expected to last for a few more months.
The Bank of India and the Central Bank of India have already
indicated that they will launch a second VRS for employees.
T
he 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.
80
Customer inconvenience was the least of the problems

that banks suffered. There were disgruntled employees
throughout the industry. Of course, this state of affairs wass
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 evident to those who
use the bank. There is now significant understaffing, and
81
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
82
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 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
83
in general, and as a result, for macroeconomic reasons, profits do

not rise 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 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.’’
84
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 exiting staff.
For instance, in Vysya Bank, according to the union, the

percentage of employees who opted for VRS was twice the
expected 10 per cent. According to HR officials at Dena Bank, in
May 2001, Dena Bank lost around 3,842 employees due to VRS (or
roughly 25 per cent of its total manpower).
Most banks followed a time-consuming policy of filling in some of

the vacancies by mobilising some staff from branches with excess
staff. Says an ex-employee of the Union Bank of India, “The banks
in semi-urban and rural areas were hit badly owing to lack of
computerisation and deployment issues.”
While 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. However, the results were not
different from before with 16 per cent below 35 years of age, a
sizeable 45 per cent between 35 and 44 years and 39 per cent
between 45 and 60 years. Roughly 75 per cent of the officers who
85
opted for VRS were in the 40 to 55 age bracket.
Further, SBI chose not to abide by government guidelines and

offered VRS only to employees above the age of 55. According to
government guidelines, any employee who was above 40 and had
completed 15 years of service was eligible for VRS. But SBI
marked its own cut-off age: it offered VRS to only those employees
who were over 55. This created a furore among employees below
55 years who also wanted to opt for VRS.
Besides, the VRS could have balanced the skill profile vis-à-vis the
employee mix (officer:clerical:subordinate), which was earlier 27.6
per cent:50.22 per cent:22.2 per cent in public sector banks. Post-
VRS, according to the IBA bulletin, the ratio changed to 25.4: 51.0:
23.6, which means that along with clerical staff, the proportion of
officers has gone down by 2.2 per cent.
The government has now disallowed new staff recruitment, forcing

banks to retrain the remaining staff to handle new duties at the
shortest possible notice. Some banks resorted to promoting clerks
to officer cadre. Andhra Bank, for example, promoted 1,200 clerks
to officers with a 20-plus per cent pay hike.
The impact of manpower shortage would have been less if the

banks’ functions had been automated or computerised. However,
reducing employee strength before technology arrived only led to
86
chaos. The IBA says that in the fiscal 1999-2000, the Central
Business Commission had summoned all banks to be 70 per cent
computerised. Accordingly, most public sector banks started to
work on the target around the time VRS was being implemented.
But an SBI HR executive says that the decision was taken too
swiftly to enable proper communication to employees. In complete
contrast, Corporation Bank refused to exercise VRS at that point
and was actually hiring 200-odd new employees for specialised
services like technology, marketing and so on. However, the bank
then considered the VRS option for about 160 officers above 50
years of age.
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 functioning
among its officers.” Eleven cases have been filed by these
employees against the bank. Says the HR executives at SBI, “It will
87
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.”
There were other problems, Says an officer with Punjab & Sind
Bank: “The VRS was conducted in a very arbitrary manner. For
instance, VRS was on the verge of becoming Compulsory
Retirement Service (CRS). A particular employee in a Mumbai
branch, for instance, wanted to withdraw her application but was
refused by the management and was forced to leave.”
Also, ironically, the financial package didn’t appeal to optees who

opted for the lumpsum payment mode. Though the VRS amount
was as high as Rs 8 lakh to Rs10 lakh per employee, most
employees were willing to prefer a monthly pension scheme.
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.”
Echoes Ganesh Shermon, senior partner, Strategy Organisation

and People, Andersen Business Consulting (soon to be KPMG
Consulting), “Banks clinically reduced the headcount. Counselling
88
and out-placement were the issues that were conveniently

forgotten by the banks pre- and post- VRS. And worse still, a badly-
planned VRS depletes the shareholder value.”
According to Shermon, there were fundamental fallacies in the

way banks carried out the VRS. A good VRS, according to him,
should be demographically aligned, based on age and competency
profile of the employees, should have a clear-cut manpower plan
and should be driven by keeping in mind future strategies of the
business. “These were missing in the VRS implementation among
public sector banks,” says Shermon.
Says HRD consultant J B Kabra of Mind Movers Management

Consultants, “To nullify the psychological impact on employees’
lives, banks could have provided them with alternative means of
employment. The optees could have been employed alternatively
in the co-operative sector banks, who constantly need staff who
can work in shifts.”
89
AND I AM ALSO OPEN TO GIVE SUGGESTIONS AS LONG AS I FEEL

TO SUGGEST!!!!!!!!!!!!
I
f 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
90
customer ever thought the reason behind it. We as customers

would newer have experienced too many employees in a bank, but
incase 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. Now
should these be solved at the cost of poor customer service?
The correct answer to this is 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 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. This was the view the union
leaders held when restrictions on recruitment was enforced by the
Government. Such being the case, much reliance may not be
placed on this. 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" and the
like? Was there a great deal of coercion from various quarters
91
leading to the implementation of the VRS uniformly in all public
sector banks.
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 officer staff when the VRS was mooted
•Pursue vigorously the computerisation 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
92
•Streamline and rationalise the systems and procedures in the

banks to meet the changing needs and expedite the process of
privatisation already under way.
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 liberalisation
process which is to be furthered in the road map for achieving
global standards.
Leapfrogging from one policy to another without

adequately strengthening the linkages can lead to
catastrophic results.
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.
93
In an ever- growing sector like banking in India, which is still facing

the problem of non-performing assets, hasty implementation of
substantive policies will make matters worse. The banking sector
has unfortunately been the target of such instances for the last 32
years!
A
fter 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 mechanisation and computerisation, selected
recruitment of specialised staff and closure of or merger of
uneconomic branches. From the published results of some of the
banks, it has been seen that the VRS outgo has substantially
94
reduced the declared profits and it remains to be seen whether the

bottom-line of all the banks has withstood the weight of this
expenditure.
Well, what has been done cannot be undone. At least now it

is imperative to take stock of the actual state of affairs and initiate
corrective measures before it is too late. Some of the urgent needs
are: Identification of deficit manpower in each bank.
Redeployment on the basis of all India norms, instead of leaving
the matter to the local or bank level management. This will be a
rational approach as the VRS norms were also on national level.
I
n order to find out the present thinking of the bank employees,
I conducted a survey by distributing questionnaire to bank
employees from NEW INDIA CO-OPERATIVE BANK, DENA BANK
& BANK OF INDIA. The survey size is 30 i.e. 10 employees each
bank.
The questionnaire for the employees is as under-
ROYAL COLLEGE OF ARTS, SCIENCE AND COMMERCE
A QUESTIONNAIRE FOR BANK EMLOYEES RELATING TO VOLUNTARY

RETIREMENT SCHEME
BANK:
AGE: SEX:
QUALIFICATION:
DESIGNATION:
NO. OF YEARS SERVICE PROVIDED:
95
1. YOUR MONTHLY SALARY RANGES BETWEEN..
BELOW 10,000
10,000 TO 20,000
ABOVE 20,000
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
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…..
96
90
80
70
60
50 accept
40 reject
30
20
10
0
The blue bar represents the percentage of employees who would

accept the VRS offer and the red bar represents those who would
reject it.
Now, the blue 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.
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.
97
40
35
30
investments
25
old age savings
20
for children
15
setting up a business
10
5
0
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 equal proportions between old age
savings, 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
98
• www.hinduonnet.com
• www.thehindubusinessline.com
• www.hindu.com
• www.merinews.com
• www.icmrindia.com
• www.planningcommission.nic.in
• www.banknetindia.com
DATA COLLECTION
From the employees of –
•DENA BANK, MIRAROAD BRANCH
•BANK OF INDIA, MIRAROAD BRANCH
•NEW INDIA CO-OPERATIVE BANK
99
FACTS ARE ENDLESS!!!!!!!!!!!
This is what I believe.
And thus, I would like to make a mention that this is not the end
on the facts of VRS. There is much more to it. I have tried my level
best to understand various factors and present it in the best
possible manner.
100
101

VRS in Public Sector Banks

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VRS in Public Sector Banks

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VRS in public sector banks

In India, the Industrial Disputes Act, 1947 puts restrictions on

introduced as an alternative legal solution to solve this problem. It

VRS means Voluntary Retirement Scheme. Employers who want to

A business firm may opt for a voluntary retirement scheme

• Due to recession in the business.

• Due to intense competition, the establishment becomes

• Due to takeovers and mergers.

• Due to obsolescence of Product/Technology

• Changes in technology, production process, innovation, new

Procedure for Voluntary Retirement Scheme followed by

The employer has to issue a circular communicating his decision

• The age limit and the minimum service period of employees

who can apply

received for consideration by the employer.

voluntary retirement and accept the benefits under such

scheme shall not be eligible in future for employment in

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

and after giving an opportunity to the applicant; of being

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

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

be treated as date of voluntary retirement.

Steps to be taken for introducing and implementing

• If the company is a public sector undertaking obtain approval

the union by communicating to them the reasons, the target

the circular or communication to employees and decide the

• After receipt of applications for accepting VRS, scrutinize,

decide whose applications are to be accepted and those whose

worksheet showing the benefits each will receive

The challenges in implementing employees Exit

with all management staff including top management.

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

sizing - both social and psychological.

• Motivate employees who will stay with the company, remove

their apprehensions and fears, if any.

accept VRS to plan their post retirement, activities and

used to ease out people.

Merits of voluntary retirement Scheme

• There is no legal obstacle in implementing VRS - as is

predominantly encountered in retrenchment under the labour

than what is permitted under retrenchment under the law.

enforcement which may give rise to conflicts and disputes.

departments where there is excess manpower.

the overall costs.

outweighs the possible gains. Trade unions generally protest the

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

It is incumbent on the establishments that they do not

An employee seeking Voluntary Retirement under the scheme will

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

• Arrears of wages due to general revision of pay scales etc.

shall not be included in computing the eligible amount.

at the minimum eligible service.

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

• No employee shall be allowed to withdraw the request made

for voluntary retirement under the scheme after it has been

to accept or reject the request of an employee seeking

to an employee shall be subject to the prior settlement/re-

payment in full of loans, advances, returning of Govt.’s property

deduction of tax at source as per Income Tax Act 1961