Why PSU banks must take advantage of retirements

The transformation of public sector banks in response to the demographic opportunity can be viewed as a critical experiment, the success of which can become a model for transformation across government.

It is well known that the public sector banks are going to see the full impact of a demographic transition over the next few years.

With recruitment numbers having dropped off sharply since the liberalisation process got under way in 1991, large-scale retirements of people hired during the 1970s and 1980s will leave large gaps in the organisational structures of these banks.

Now, one way of looking at this is that it presents a significant opportunity to restructure these entities so that their operations can extract the full benefits of new technologies and incentive mechanisms, which their legacies have prevented them from doing so far.

They could then emerge far better equipped to balance their dual mandates of profitability and financial inclusion.

Instead, the government seems to be stuck in a business-as-usual mode.

Newspaper reports suggest that the proposed response to the manpower crunch is to lower standards of promotion and, consequently, elevate the existing ranks faster and with inevitably weaker levels of competence.

With the reputation that these banks have as a group for efficiency and service quality, this seems like adding insult to injury.

Over more than four decades that the bulk of banking activity in India has been done by government-owned banks, the sector has undergone dramatic changes.

Some have not necessarily been for the better, as was demonstrated during the financial crisis of 2008, but this cannot be the predominant metric by which to judge progress.

Even within the boundaries imposed by conservative prudential standards, the new, private sector banks in India have demonstrated how effective the right mix of technology and organisational design can be in delivering an ever-increasing range of services to their customers and relatively good returns to their shareholders.

There are lessons to be learnt from this experience, in terms of both how to and how not to do business in the contemporary environment.

The demographic transition in public sector banks creates an opportunity for transformation that has never been seen before and it would really be a shame if it was missed because of short-sightedness and inertia.

Actually, what the banks will experience reflects a broader transition with the entire public sector, including core government functions.

Employment in the public sector has been steadily declining since the late 1990s, as attrition has exceeded recruitment.

Many public services have seen a significant improvement in process efficiency and service quality during this time, as information technology has been deployed and used widely.

In fact, its penetration has been facilitated by the reduction in employee headcount, as there is less resistance to face. However, it would also be fair to say that the transformation has neither been systematic nor been driven by any explicit strategy.

The underlying reason for this is that IT cannot be just grafted onto an existing system; the system itself has to change to appropriately achieve optimal outcomes.

This is where the public sector in general has been sorely lacking. Archaic systems and processes persist amidst technological upgrade and process re-engineering.

The transformation of public sector banks in response to the demographic opportunity can be viewed as a critical experiment, the success of which can become a model for transformation across government.

Photograph: Mukesh Gupta/Reuters