I have not checked with my friends in private sector banks whether they have sunk into a pit of depression; I am a tad scared to check. The Reserve Bank of India (RBI) has said that the average compensation of a PSU bank employee has exceeded that of a private bank employee, and is now 150% of the latter. To rub salt on the wounds, the regulator has also said that this is despite PSU banks’ pension liabilities not being fully reflected.
To that let me add another well-known one - PSU bankers enjoy a lot of non-monetary perks, whose value too is not adequately reflected in the salary costs line.
I am surprised that this revelation did not lead to another media tirade on the poor little rich PSU bankers. Actually the annual data has been there on the RBI web site for everyone to see, in the form of total employee expenses and number of employees. Maybe few cared to divide the former by the latter to compute the mischievous average.
So should RBI now withdraw its guidelines on private sector bankers’ salaries? No. Should we now be ready to throw the idea of poorly paid PSU bankers out of the window? Well, possibly out of the study table but not the window.
Averages are known to hide a lot. This time they have behaved like swimsuits, revealed a lot as well.
What’s happening here? The PSU bank workforce is significantly more aged than the private banks. The average age of employees of state-owned banks is around 50, whereas the same for their private counterparts is around 30. However well the private banks may be paying their employees, it is hard to beat the public sector average since the employees are 20 years senior.
There is really not too much difference in the entry-level compensation. As one goes up the hierarchy, the disparity between PSU and private bank employees increases. This is what we get to see most of the time, i.e. the irrationally low compensation of top managers of PSU banks vs. private banks. That is more news-worthy and sensational than calculating an average.
FY2011 was also the year when gratuity coverage increased and nearly half of the PSU bank workforce opted out of provident fund to pension, which increased employee costs. It was accompanied by the conclusion of the last five-year wage agreement. Moreover, the comparison is influenced by the fact that after the 2008-9 period, rapid-fire salary increases in the private sector came to a halt.
Let us be fair to the PSUs. The eight-year period starting from 2001 saw remarkable productivity growth, the banking sector’s worst-publicised fact. In 2001 these banks ran a Voluntary Retirement Scheme through which the workforce shrank by 15%. Thereafter there was an employment freeze, the banks computerised progressively, re-oriented their processes and rolled out several new products and services with the same manpower (actually declining, because of retirements). In fact, productivity growth was the single most important reason for improved return on assets of PSU banks during this period, followed by reduced provisioning on bad loans. It is only in the last 2-3 years that PSUs have resumed recruitment in earnest. If a part of the productivity increase got notionally “passed on” in the form of higher wages, it is perfectly justified.
But that’s precisely where the catch lies. The step-jump in productivity growth was a once-in-a-lifetime event. There is a limit to how much you can squeeze out of the current cost base. Outside of that, it has always been the rigidity of the PSU bank employee cost structure that has been their bane.
It’s thoroughly inconceivable for PSU banks to do what ICICI Bank did in 2008 - froze salaries and gave no bonus (to most) for two years, to counter the slowdown as well as their own problems. Several attempts to build more variability in salaries of PSU banks have had little success. The present system of a 5-year umbrella wage agreement across all PSU banks regardless of individual banks’ profitability will create a problem of unmanageable proportions in future. Socialism may be good, but you soon run out of other people’s money (Margaret Thatcher’s line). Our current entitlement culture is unable to see through this.
Also, the expense ratios of PSU banks still look respectable because their retail businesses are small. As this cost-intensive segment expands, rigidities will bite harder.
PSU banks constitute 70% of the banking system. They can ill-afford to swim against market realities and hope to come out unscathed. That does not mean surrendering abjectly to market trends but recognising and respecting them. This mindset change has to be ingrained in the Finance Ministry more than the PSU banks as critical decisions are taken by the former.
Dipankar Choudhury was Director of Indian Financial Services Research at Deutsche Bank, and is currently an independent consultant focusing on banks and financial services.