By Himendra Kumar Vinay Luthra is out of a job -- and quite happy about it. Soon after his premature retirement from the government-owned State Bank of India, where he was an assistant manager for more than seven years, 37-year-old Luthra has three job offers from foreign banks. They're dangling a salary nearly four times what his last job paid. The positions come with perks like company-subsidized housing, two weeks of all-expenses-paid annual vacation, and professional growth, something he could not dream of with the State Bank job. "I decided to quit because I was stagnating and getting frustrated over the last three years," he says. "But I wasn't a risk taker, so I stuck with the job."
Luthra is among the 53,100 officers of the State Bank's 204,000-strong management-level workforce who are opting out through voluntary retirement. Behind the departures is the Indian government's decision in January to begin a massive restructuring of 19 state-owned banks, with a generous $1.6 billion voluntary-retirement scheme for bank officers. The Indian Banks' Assn., which framed the buyout program for the government, hoped to reduce the state institutions' staff of 874,000 by about 10% when the scheme closed on Mar. 31, 2001.
SCRAMBLING TO COMPETE. However, an alarmingly high 22% of the public-sector banks' workforce have opted to leave. Judging by the warm response, the institutions risk being crippled by the loss of many of their best employees.
These banks once dominated India with an estimated $18 billion in assets. But since 1991, when the government opened banking to private players, many technology-savvy new private and foreign competitors have entered the market. Hampered by loads of bad loans, outdated technology, and payrolls bloated by political patronage, the state banks can't compete with these nimble rivals. The public-sector outfits' market share has dropped from 100% to 80% in just seven years. Hence, the rescue operation was launched.
But the government's offer of $15,000 to $17,000 per departing employee was hugely attractive, since execs' annual income of $4,400 to $4,800 is well below the $11,500 to $24,000 that private banks offer. "We would rather quit. Most of us are young enough to start life afresh in the private sector," says Raj Hans Gupta, a middle-ranking State Bank official who has already put in his papers.
LESS PRYING. Alarmed by the rush to the exit, India's state banks are putting together survival plans of their own, beyond the government's requirements. Some are extending their hours to make banking more convenient for their customers. And the state-run Punjab National Bank is planning to trim its interest rate on housing and car loans by 150 and 200 basis points, respectively. The bank has also simplified its lending procedure with fewer forms to fill out and fewer prying questions. "Intense competition has put pressure on interest spreads, forcing banks to earn more through noninterest income," says N.S. Gujral, executive director of the state-owned Corporation Bank.
It's not that the Indian banks are all bad. Being in business a long time has given them some major strengths over their newer rivals that they can build up on. They have nurtured long-standing customer relationships, cultivating loyal clients. Despite some inefficiencies, the customers would not leave the comfort of a branch manager who knows their needs well.
Anand Vashi, a top tax consultant for large companies in Bombay, says he wouldn't defect from the Bank of India, where he has banked for 40 years, for all the fancy offerings of private banks. He says he prefers the state banks' "personalized service vs. the impersonal services I get from the foreign banks who forget about me once I give them my account."
CHERRY PICKING. But the state banks won't survive if they don't change. Even Indian central bank Governor Bimal Jalan admits that the banks' bad loans are a major problem. "No bank can survive long-term with such high bad loans. India's banking system has suffered mainly due to the banks' mismanagement of funds," he says. Gross nonperforming assets of the country's banking system, dominated by state-run institutions, totaled nearly $14 billion at the end of last year.
The situation isn't all of the banks' making. They have been hobbled by socialist laws that force them to lend 40% of their portfolios to rural areas, where loan repayment hovers at an abysmally low rate of 33% to 39%. Largely because patronage jobs have swelled their staff, Indian public-sector banks spend close to 18% of their income on labor, against a global average of 7% to 9%.
The winners will be Indian consumers -- and, of course, the private banks. Private players such as ICICI Bank and foreign entrants like Bank of America say they've been deluged with job inquiries and applications from state bank staff. But says Gurpreet Singh, an ICICI Bank assistant manager: "We cannot possibly take everyone. We will pick and choose the best talent available." That's music to the ears of Indian consumers. They'll soon be laughing all the way to the bank. Kumar is a freelance writer based in New Delhi