Bank employees' 15% wage hike may not be a costly affair for lenders

The hike in pay slip cost does not factor in superannuation and pension costs, along with performance linked incentives

The wage negotiation agreed upon by bank unions and managements may not have a significant impact on the balance sheets of the lenders in near future.

On Wednesday, the Indian Banks’ Association (IBA), representing the management of 35 banks, and United Forum of Bank Unions, representing close to a million workers and officers, signed a memorandum of understanding (MoU) to go for a 15 per cent hike in the existing wage bill. While this will be effective from November 2017 till October 2022, a first-of-its-kind performance-linked incentive (PLI) for state-owned banks will be implemented from the present financial year.

The wage bill for the lenders, which include public sector banks (PSBs), old generation private banks, and a few foreign banks, comes to roughly Rs 56,000 crore annually as of March 2017. A 15 per cent hike in the wage bill translates to an addition of around Rs 7,900 crore a year. 

The MoU has to be converted into a formal agreement within 90 days, which will state the distribution of annual wage increase between workers and bank officers, along with some other terms that will not have further financial implications.

Most banks have been accounting for a hike in the wage bill, in the range of 12-14 per cent, and have made suitable provisions on their balance sheets since November 2017. 

“Banks have already made a provisioning of 80-90 per cent on their books, keeping in mind a possible wage hike scenario,” a PSB managing director and chief executive officer said, requesting anonymity.

The 15 per cent hike in pay slip cost does not factor in superannuation and pension costs, along with PLIs. But banks have a rough idea about the superannuation and pension bills as the basic pay will not be increased by more than 2.5 per cent, i.e. Rs 1,155 crore. Most of the pension and superannuation costs are linked with the basic pay. 

The previous wage terms (2012-17) had a basic pay load of 2 per cent, in the overall 15 per cent wage bill hike that was implemented during the period.

The superannuation cost of banks would be around Rs 5,000 crore, according to rough calculations made by the IBA. “But it’s more of a provisioning which is to be done for future payments and would be one-time in nature,” an IBA executive said.

Further, the banks and unions have given an in-principle approval to remove the cap on monthly family pension of Rs 9,000, though it is not a part of the MoU. But for most banks, this scheme is related to widows of bank employees and does not cover a large number of people so the cost implications will be paltry, a bank executive said.

The PLI, in the range of an additional salary of 5-15 days, is strictly based on the profitability levels of banks. If PSBs do not report an increase in the operating profit by more than 5 per cent, they will not give out PLI to its employees. Even if they do have an operating profit of over 5 per cent, they still have to clock net profits annually, failing which such bank employees will only get additional five days of salary each year. The Covid-19 pandemic will have an impact on the profitability of most banks.

RBI Governor Shaktikanta Das said in an event on Saturday that the medium-term outlook was “uncertain, and depends on the Covid-19 curve”, as the pandemic would result in higher non-performing assets and capital erosion of banks.

So, the PSBs will unlikely dole out PLIs to their employees immediately.

The bank unions and management have also agreed for encashment of paid leave, in the range of five-seven days and a hike in the contribution towards the National Pension System from 10 per cent to 14 per cent of the basic pay.

The 11th bipartite wage negotiation between the management and the unions was the longest talks so far in terms of the time taken to arrive at a settlement (close to three calendar years from the date of effective implementation). 

The unions had demanded a 20 per cent wage hike, along with other strict demands such as a higher hike in the basic pay component, at 4 per cent (from 2.5 per cent which has been agreed upon now). Last time when the IBA and the UFBU sat to hammer out the deal, the talks were broken due to a demand for a higher hike in the basic pay component which the bank management representatives didn’t agree to.

“But the unions came along this time as they understood the impact that the pandemic could have on the balance sheet of banks. If talks were delayed further, the impact of the pandemic would have been more visible and negotiations would not have been favourable,” a PSB executive explained.

The Wednesday’s meeting was the first between the management and unions after Covid-19 impacted economic activities in India. The last such bi-partite meeting took place on February 29, before a two-month national lockdown was enforced in March to manage the Covid-19 pandemic. “The IBA got some a lot of comfort after getting a nod from the Finance Minister (Nirmala Sitharaman) who was firm that the deal should be closed sooner to give a wage hike to bankers and looking at the pandemic situation, it is a good settlement after all,” an IBA executive said.

However, one bank union — the Bank Employees Federation of India (BEFI) — didn’t agree to sign the MoU. The BEFI was unhappy that the IBA didn’t agree for merging the special allowance with basic pay component, which could have increased the take-home salary of workers. It also didn’t favour PLI for bank employees, apart from only a 2 per cent hike in the basic pay, against a demand of 4 per cent. 

The IBA hasn’t accepted another demand for five-day week work in the banking sector, which has irked the BEFI.