THE ADVANTAGE TO FINANCIAL INSTITUTIONS

Banks are looking at massive savings and efficiency gains

By Khurram Baig
Oct 20 - 26, 1997

The current buzz word in local economic circles is the golden handshake and one after the other, almost all public sector organisations have come forth and announced programmes of their own. This is part of a government plan, launched on the instigation of the two Bretton Woods institutions with the aim of increasing the efficiency of these organisations. The aim of the programme of course is that with increased efficiency and cost cutting the whole economy will improve. It is now the practice of the donor agencies that they do not just give funds but ensure that the funds are utilised in a manner such that the borrower will be able to repay the loan and the interest. It is a part of this policy that these agencies now often give governments a course of action that they believe will increase the country's ability to repay the loans.

While, the golden handshake has definitely become the topic of the day and is bound to have serious implications both social and economic, it remains to be seen that what will be the extent of the gains that the institutions going through restructuring. After all the problem of over staffing is not the only problem that is plaguing the financial health of say for example the big nationalised banks. These banks are the focus of the public eye at the moment and they have already retrenched a large number of employees with the possibility that more are to follow and those that have not so far begun, intend to do so within a very short period of time.

Almost all the banks intend to lay off between 5000 to 10,000 employees, which means that a minimum of 20,000 and a maximum of 40,000 people will be given the option of the golden handshake.

Benefits to the banks

Now with so many people being laid off in matter of weeks, there is no denying that the banks will save a tremendous amount of money on salaries, fringe benefits and perks that these employees were getting. A ball park figure of the approximate annual saving that these banks will be making as a result of this downsizing is anywhere between Rs 2 to Rs 3 billion. In other words the banks, if they follow certain principles will be able to recover the whole cost of the handshake in a few years, five years give or take one year in some cases and maybe even sooner.

One were noticeable benefit that the banks will get is efficiency gains. The whole practice of downsizing is actually aimed at getting rid of those employees who were appointed through political pressures, favouritism of senior employees or under pressure of the unions. These employees were for the most part nothing but a burden on these organisations and just served to increase the strength of the unions which in turn disrupted the smooth functioning of the banks. A majority of these employees will now be laid off, thus increasing the overall efficiency of the institutions. Per capita output of the banks, in other words the output of each person will increase as a result of this because people will now want to hold on to their jobs. This will result in the efficiency that we mentioned, and therefore the banks will still performing at their peak levels, will have lowered their expenses tremendously.

Another benefit of this move is that the banks, with their reduced staff and lower expenses will now be in a position to hire better qualified staff at better salaries, increase the salaries of the existing employees to encourage them to work harder and in this way give efficiency a further boost. The new employees, which will include a mix of both experienced and fresh people will give a new perspective to both the policy makers of the bankers as well as the people that will in the front ranks, dealing with the public.

The excess liquidity that the banks will now find themselves to be in possession of will give them the ability to introduce positive changes and technological advancements into their organisations, advancements like, ATMs, evening banking, online banking, computerised data basing of the records and accounts and also do some face lifting of their branches in order to be able to better keep up with the newer and much snazzier private banks.

An indirect effect of this exercise if carried out probably is that it will go a long way in improving the image of the banks and will convince people that the banks are serious about increasing their current level of performance. This kind of positive projection has many windfall effects in today's media driven environment and could very result in more business for the bank.

Also, with the all round savings that the banks will be making, they will have a better balance sheet, their cash flows will improve and among other things they will become more liquid. Therefore, if they should so desire, they will be in a much better position to provide credit to the private sector.

Of course the biggest benefit, the one which the government holds dearest to its heart is that this exercise, if carried out successfully, will greatly facilitate the privatisation of these financial institutions.

However, the banks need to keep in mind, that for the downsizing to have an optimum impact, the loan recovery drive will have to be intensified because that is where the bulk of the banks earnings in the next couple of years will come from.