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V. Pitre

"... the driving force in the path ahead will be the immense capabilities that we possess in terms of human resource. In the years to come the `human bias' is likely to get stronger and the quality of human resource would become the cutting edge of competitiveness... "

Dr Bimal Jalan.

SINCE the process of liberalisation and reform of the financial sector were set in motion in 1991, banking has undergone significant changes. The underlying objective has been to make the system more competitive, efficient and profitable.

With greater globalisation and expansion of financial services, risk management has become critical and indispensable. Since 1991, there have been two major stock market scams — those engineered by Harshad Mehta and Ketan Parekh. These were systemic crises that cast doubts about the efficacy of the banking system. Low labour productivity was cited as one of the important factor for this state of affair.

Against this backdrop, we try to understand the concept of productivity and profitability. Output of each sector can be measured in real and monetary terms.

In manufacturing, value added or net output is taken for output measurement. In the services sector, output is not tangible; therefore, it is difficult to quantify.

Different proxy indicators such as profit and volume of business per employee are used to measure labour productivity, an important but not the sole factor influencing profitability. The real variable, such as the number of accounts per employee, is the other indicator of labour productivity. The point is, the results obtained from these two factors — real and financial — need not be same.

Often these are contradictory. Ranking on the basis of number of accounts per employee and the volume of business per employee may yield different and, in some cases, contradictory results.

The break-up of the number of accounts per employee and the deposit and credit accounts per employee for different categories of banks in 2000 are presented in Tables 1, 2 and 3. There is a line of thinking that officer orientation will enhance productivity. And it is presumed that with the onset of Internet banking, specialised skills would be required. This leads to contradictions.

There is now a dual economy — with primary and industrial sectors on one side, and the information-based one on the other. The problem of constant/decreasing returns versus increasing returns, too, emerges. The divide between the two is digital, causing a number of problems.

Turning to productivity and profitability of the banking sector, it is found that the total number of accounts per employee, at 885, is highest for regional rural banks (RRBs). For foreign banks it is 291, the lowest amongst the bank groups. But a further break-up into credit and deposit accounts shows that the large number of accounts per employee in RRBs is because of higher deposit rather than credit accounts. This is true in the case of other bank groups as well.

As regards credit accounts per employee, foreign banks emerge the second largest with 107. For RRBs it is as low as 41.

This poor credit-deposit ratio of Indian banks, termed as lazy banking, affects interest spreads and, in turn, profitability. Investment in government securities has become the core activity of most banks, including RRBs. Examining the amount of deposit or credit per employee, RRBs rank low vis-à-vis the other banks.

Ditto with regard to the amount of deposit/credit per office. Foreign banks, as expected, are far ahead on this count.

The workforce composition shows that foreign banks have the highest percentage (61) of officers. Surprisingly, RRBs have the highest percentage (41) of officers amongst Indian banks. Around 50 per cent of the staff in Indian banks is clerical and 20-35 per cent subordinate.

Considering the country's overall requirement, what is optimal workforce mix? As a large portion (70 per cent) of the population still lives in rural areas, spreading the banking network and the basic activities of savings mobilisation and lending should remain the core objective. Much of rural India's credit needs are still met by local moneylenders.

Bringing clerical and subordinate staff into the mainstream will promote productivity. This would not only lower the cost of service but also enhance profits and business volumes.

As far as central banking is concerned, its activities broadly comprise currency management, supervision of banking activity and formulation of monetary policy. Country-wise data on central bank staff per 1,00,000 population is rather revealing.

The RBI has a low percentage (28) of officers. Its clerical and subordinate staff (including sweepers) constitute 44 per cent and 31 per cent of the total workforce respectively, which is higher than that of commercial banks. This is noteworthy as central banking is supposed to be more specialised than commercial banking.

Further, the largest number of officers (70 per cent) is in the RBI's department of technology. But the Bank's research wing, comprising the economics and statistics departments, has a low percentage of officers — 37 per cent and 26 per cent respectively.

The RBI must be complemented for making this data available in its annual report. Similar data with regard to major categories of banks must be published in the `Trend and Progress of Banking in India'.

This, apart from imparting transparency, makes the labour and organisation concerned more accountable to the public.

But the total picture on staffing pattern is getting blurred, as banks are hiring contract workers and outsourcing jobs. Data on this, if made available, will facilitate a cost-benefit study of the contract and permanent workforce. Information on the wage bill of the different categories will help identify areas for cost cutting.

The quantity and quality of staff emerges as the key component in determining overall productivity — directly through the wage bill and indirectly through output changes.

India's rank in terms of the ratio of central bank staff to population is rather low. In contrast, in developed countries, which have become almost "cashless", the number and volume of banking transactions are high.

The high level of automation takes care of not only the volume of transactions but accuracy as well. In spite of this, central bank staff strength in these countries is high.

Whether this is one of the factors that is ensuring the efficient functioning of the system there needs to looked into.

That much of the country's population is outside the banking ambit is common knowledge. For two decades after bank nationalisation, there was an upsurge in small borrowal accounts.

Between December 1972 and June 1973, there were 212 million additional bank loan accounts for scheduled commercial banks, of which, over 90 per cent were accounts of Rs 10,000 or less credit limits. Such a trend continued till 1991. But during 1992-2001, while there was an absolute decline in bank accounts by about 13.5 million, borrowal accounts with higher credit limits showed unusually large increases.

The prudential norms and other financial sector reforms are cited as reasons for this. The share of small borrowal credit account has declined from 22 per cent in 1992 to 7 per cent in 2001.

This is an important factor that has led to the situation of "surplus labour" with reduced volume of bank accounts. A distressing trend, as the very purpose of reform is to broaden and deepen the market.

Thus, a comparison of labour productivity and profitability indicators shows that RRBs and other Indian banks have a high ratio of accounts per employee. But this is largely because of deposit accounts; the credit account picture is still bleak.

Besides, productivity indicators are being mixed up with profitability indicators; there is a need to distinguish these. Further, this raises the question whether efficiency should be measured in terms of productivity or profitability. It is hard to understand the rational for an early retirement scheme (ERS) as proposed by the RBI.

When motivation level is at a low, it is but natural to expect talks of such schemes to increase. Measures to actively involve every hand are the need of the hour.

(The author is with the RBI. The views are personal.)

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