VRS IN PUBLIC SECTOR BANKS

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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.

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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

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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

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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

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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

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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

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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

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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

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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).

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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.

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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.

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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.

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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

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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. ………

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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.

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.

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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

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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

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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.

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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

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21,050 crore. By 2001-02, staff costs had dropped to Rs 18,959 crore. 17500 18000 18500 19000 19500 20000 20500 21000 21500

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.

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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

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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.

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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

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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

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•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

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•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

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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.

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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

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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

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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

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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.

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

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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".

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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

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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

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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

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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;

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•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

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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.

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(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.

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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

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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

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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.

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Investment of VRS amount

ith the advent of the Senior Citizens Savings Scheme, those opting for retirement, voluntary or otherwise, suddenly had a window of opportunity.

W

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.

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Analysis

The ex-gratia is exempt up to Rs 500,000.Assuming that the rest of the amount is subject to tax at the highest rate of 33.66 per cent, the amount remaining in hand works out at Rs 662,737.

• [745,308 - 500,000 =

245,308]

• [33.66% of 245,308 = 82,571] • [745,308 - 82,571 = 662,737]

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.

TABLE

(a) Age 45 years 7 months Service put in 26 years 2 months Residual service 14 years 5 months Current gross pay Rs 15,668

Entitlement for VRS Ex gratia Rs 745,308 PF Rs 346,910 Leave encashment Rs 151,050 Gratuity Rs 299,565 Pension commutation Rs 114,328 Total Rs 16,57,161 Monthly pension Rs 6,138

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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.

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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.

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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.

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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.

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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

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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.

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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'

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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.

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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.

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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.

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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.

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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

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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.

Figure

Updating...

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