Pension option likely to cost banks dear

The wage revision agreed upon by the Indian Banks’ Association (IBA) and bank unions recently could crimp bank profits over the next few years.

This is because, while banks had factored in the 17.5% wage hike in their reserves, they are yet to create a reserve for the pension option to employees provided in the agreement.

The pension burden is projected at around Rs 14,000 crore for the banking industry.

“The pension burden can potentially impact FY11E profits by 30% or networth by 5%,” said Suresh Ganapathy and Mudit Painuly in a Macquarie research report.

Some of the smaller state-owned banks, which have low productivity levels due to overstaffing, are likely to
get hit more than the larger ones who are likely to have a 5% impact on reserves, the report adds.

“We are assuming 50% of our employees will opt for the scheme, for which we will have to set aside Rs 400 crore annually for 5 years to create a reserve,” Alok Misra, chairman and MD, Bank of India said recently. “That will naturally have some impact on profits.”

Union Bank, which had an employee strength of more than 29,000 in the year ended March, expects over 75% of employees to go for the pension plan. “There could be a funding gap of around Rs 1,000 crore, which we will have to provide for over a period of 5 years,” said executive director S C Kalia.

For the 260,000 existing and 50,000 retired employees, this is another chance to opt for the pension scheme.

For employees joining banking services on or after April 1, 2010, on the other hand, the contributory pension scheme as introduced for Central Government employees is applicable.

It took 30 months for the bargain between the IBA and banks unions to settle. “It is a costly proposition for banks, hence was not being considered viable,” said a senior official from IBA.

Macquarie analysts believe banks may make a representation to RBI to adjust this additional pension burden against their reserves similar to the one-time adjustment they undertook for their transitional liability when they moved to AS-15 norms about two years ago.