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Banking: Winds of change strengthen - Views on News from Equitymaster
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  • Feb 14, 2003

    Banking: Winds of change strengthen

    The banking sector has undergone sea change over the last five years. With the entry of private sector players, it has now become imperative for PSU (public sector undertaking) banks to become more if not as competitive. We take a look at the one of the various measures adopted by the banks the as they ready themselves to face competition.

    To be competitive PSU banks have to be as operationally efficient as their private sector counter parts. The gap is evident from the fact that while HDFC Banks does Rs 65 m of business per employee the figure is on an average Rs 18 m for 27 PSU banks. Thus, the imperative for PSU banks is to be more productive. This comes from implementing technology and rationalisation of human resources. Therefore, in an effort to become more competitive vis-a-vis private sector peers, PSU banks have initiated VRS (voluntary retirement schemes).

      FY01 FY02
    Total VRS expenses (Rs bn) 30 23
    Employees relieved 82,976 18,569
    Total employee strength 863,214 746,810
    Employees relieved as a % of total employees 9.6% 2.5%
    Average business per employee (Rs m) 15 19
    Growth in average business per employee 26% 22%

    Figures are that of 27 PSU banks

    The scale of the VRS is evident form the table that indicates the total VRS expenses over a two-year period. Total employees removed due to VRS constituted nearly 11% of the total work force of PSU banks at the end of FY02. Due to the realignment of work force there has been an improvement in the business per employee figures of these PSU banks.

    However, the real impact of these steps taken by these banks is still not visible in quantitative terms. For example in 2000-01, the staff cost of all the 27 public sector banks, was Rs 210 Bn. The figure dropped to Rs 189 bn in 2001-02 (a steep drop of 10%). However, this improvement has been offset by the amortisation of VRS expenses. This is due to the fact that amortisation of VRS expense is allowed for a period of five years and it is likely to be progressively reducing as the banks make provision aggressively.

    (Rs m) BOB BOI SBI Corporation
    VRS expenses
    9mFY02 1,313 1,030 3,545 NA -
    9mFY03 1,283 1,020 2,659 NA -
    Cost to income ratio
    9mFY02 56% 53% 55% 37% 45%
    9mFY03 48% 48% 51% 32% 45%
    No of branches 2,641 2,528 9,016 669 220

    NA: not available

    Despite the write off the positive impact of fall in wage costs of PSU banks was visible in FY02 . The cost of income ratio of the PSU banks has shown an improvement since FY01. Among the observed set only Corporation Bank is comparable to an extent to its private sector peers. But what is more important to note here is the fact that while PSU banks may have comparatively poorer cost to income ratio, the potential for improvement is large. As the VRS schemes are terminated, PSU banks will save considerably on VRS as well as expenses of employees that have already opted for these schemes. This will add directly to the bottomline of these banks. The true impact of these measures may well be visible from FY04 onwards. The main beneficiaries are likely be the larger banks that will shed more of excess capacity. To name a few SBI, that approved the VRS applications of nearly 21,000 employees in FY01, BOB (5,000) and BOI (6,500).

    A very interesting observation is that while PSU are saving expenses, private sector banks have to spend more as they cannot match PSU banks in terms of reach. Large PSU banks have a huge reach across the country, which is indicated by the number of branches in the table. Private sector banks are in an expansionary phase and are likely to incur significant costs on setting up infrastructure and hiring manpower. Infact the private sector banks have shown a steady deterioration in the cost to income ratio in FY03 on the back of aggressive expansion plans. Having said that we must also point out that VRS is only one way of increasing the productivity and it may be a while before PSU banks reach a stage when all the steps like VRS and technology initiatives yield tangible results.

    Thus, PSU banks can unlock a significant amount of value by implementing technology as well as other cost rationalisation measures. However, improving productivity is just one of the things that go into making a successful business. The challenge is whether the managements of these banks are capable enough to take Indian PSU banks in to a different gear especially in terms of customer orientation. Taking in to account whatever has been done so far there definitely seems to be intent to do so.



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