Academic journal article International Journal of Employment Studies

The Impact of a Voluntary Retirement Scheme on Indian Public Sector Banks and Its Existing Employees: An Empirical Analysis

Academic journal article International Journal of Employment Studies

The Impact of a Voluntary Retirement Scheme on Indian Public Sector Banks and Its Existing Employees: An Empirical Analysis

Article excerpt

The objectives of the banking reforms in India suggested by Narasimham Committee II were to keep banks financially sound while encouraging more competition and reducing government ownership of state banks. Among many management and structural issues, it also suggested that a voluntary retirement scheme (VRS) may be introduced in the banks to reduce over manning, wherever necessary. As a result, all public sector banks (PSBs) in India except Corporation Bank introduced VRS on a non-discriminatory basis. More than one hundred thousand bank employees in different cadres accepted it and were allowed to retire under the scheme.

This article, based on a primary survey conducted in a few selected Indian States, attempts to find out the impact of VRS on public sector banks and its exiting employees. The results point out that although customer service and efficiency in the banks has become better, VRS has adversely affected the existing employees because of increased workload and work responsibility. However, business per employee and profit per employee in public sector banks has increased and now they have low non-performing assets (NPAs).

The Probit analysis concludes that the differences in the household characteristics are some of the plausible reasons why some employees opted for VRS, while the others though eligible, did not find it attractive.

INTRODUCTION

The Indian banking system is going through a period of far-reaching changes. The banking system has been aimed to provide a diverse financial infrastructure so as to help the process of resource mobilisation and to meet the expanding and emerging needs of a developing economy. It is well recognised that the structure and size of the financial sector play a critical role in achieving sustained economic growth in any economic system. The financial sector acts as a conduit for the transfer of financial resources from savers to borrowers. Rangarajan (1998, pp.130) describes these economic functions of financial sector in terms of liability asset transformation; size transformation; maturity transformation and risk transformation. The financial intermediation supports increasing capital accumulation and helps in economic growth. Financial structure has to be designed so that financial intermediaries and capital markets can play their role effectively. A strong financial system is central to the objective of strengthening the real economy and for its healthy and orderly growth. But it is empirically found (Demirguc-Kunt and Levine; 2001, pp.233) that along with a higher level of overall financial-sector development, the legal system, which protects the rights of outside investors more efficiently, helps economies, industries and firms to grow faster. It was also found (ibid, pp. 257) that greater bank development brings about tougher competition, higher efficiency and lower profits. Thus, greater financial development would improve the efficiency of the banking sector, potentially leading to higher growth, both at the firm level and the macro level.

The financial sector reforms were initiated in India, as a component of stabilisation and structural adjustment programmes in mid--1991. The banking reforms were believed to be essential not only for economic integration but also for financial integration with the outside world. The recent banking sector reforms could be construed as policy response sought to eliminate the phenomenon of financial repression (1), which had crept into the system over the years. The objectives of the reforms were to keep banks financially sound while encouraging more competition and reducing government ownership of state banks. The reforms are so designed as to enhance the productivity and the efficiency of the economy through enhancing operational efficiency and allocative efficiency and also increasing international competitiveness. The reforms are comprehensive in scope covering wide inter-related aspects. …

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