Riyaz Ahmad Bhat
The efficiency of any business or a system has been considered very important to decide about its future operations. This as a key parameter needs to be measured in quantified way to review progress of a business or a system. In modern scientific age the quantification of parameters and measuring them on scale of grading and ratios has taken a key position to evaluate performances and suggest future roadmap of businesses and systems. One of such parameters in today’s business operations, which have come into existence, is cost to income ratio (CIR) which depicts the relation between the cost of inputs to cost of output. This ratio is also termed as efficiency ratio and every organization is continuously taking review of its business performance in light of this parameter and its future course is also dictated by the quantum of this ratio prevailing at the time of the review. The banking industry, in India, has been no exception to this growing trend and the managements have been quick enough to shift the mechanism of review based on this trend. In any review the quotient of performance by the bank revolves around the discussion on efficiency ratio which is perceived to give a clear view whether resources deployed are being efficiently utilized to maximum of potential or any wastage is being observed in deployment of these resources. However it needs to be kept in view that unlike other businesses banking does not consume the material inputs which get converted into saleable commodities and both can easily quantified to reach any conclusion in this regard. Banking industry involves complex processes of input human effort and technology to give us out put services generating revenues hence borrowed ratios of manufacturing sector cannot evaluate performance of this service industry.
The ingredients of usage of services by men and technology need to be quantified in more acceptable and rational way so that stakeholders of industry do not doubt the formulas calculating these type of ratios. Hence it becomes necessary to create a consensus in creation of relation of the income generating heads with the end services revenue realization so that acceptability of efficiency ratio by all the stakeholders is reached and industry moves forward by getting benefitted through the evauation process of its efficiency. In present scenario while calculating the efficiency ratio the banks have only related their establishment and other operational costs to incomes and this formula of calculating the efficiency ratio has not been acceptable to various stakeholders of banking industry particularly to the staff employed with this industry.
This important stakeholder which has been contesting the present mechanism are represented by the unions and they consider it as a ploy by the owners of the banks to deprive them from reasonable revision of their wages and adequate deployment of human resource for the job thus exploiting them to maximize the profits.
On the otherside bank managements while relying on present formula for calculating efficiency have been arguing of banks being overstaffed and furthering their idea of having more scope of more mechanizations of processes in Industry. Their way of argument is based on common perception of that over staffed banks are facing a constant challenge of increasing wage bill which has been a road block in improving efficiency. The figures put forth in this regard are that the world economic report on Indian Banking for year 2020 has calculated the average cost to income ratio of at 46.8%. In the same breathin 2021 some of the Public sector Banks(PSBs) in India publicly announced that they are committed to bring down the efficiency ratio to below 50% in year 2022 prevailing at that time. At same time some large private Banks were reporting efficiency ratio of around 40% or below and they had declared their commitment to bring it down further.
So far the general perception of industry watchers, regarding efficiency in PSBs. is concerned most of them are of the opinion that a very low efficiency in these banks is due to increasing wage bill of organized workforce of these banks. The cause of technological backwardness of these banks in providing banking services is considered other factor, which is resulting in losing market share of business. By this Propagation of such type of perception the supporters of crony capitalism have been able to generate a motivated campaign to demonize the unionized human capital of banking industry. It is a fact that unions have been challenging the present formula of calculating this cost to income ratio and their challenge is based on sound arguments. Their argument is that not including various productive elements in present formula, by the bank managements, looks ill motived to put the contributions made by the human capital in bad light while giving a cover up to bad decisions of the top management which have dearly affected the performance of these banks.
Their argument is quite tenable that not relating the accrued income of Non-Performing Assets to establishment cum operating expenses deprives the ratio from its accuracy. To sustain their argument they rely on the view of the experts who have put in argument of relating the non-accounted income of bad debts in direct relation to income. Experts of such thought consider it because these amounts are the incomes generated. Here we may emphasize that the onus of non-realization of this accrued income cannot be related to efficiency of input services. The direct relation of these non-realizable incomes is to risk mitigation done by top management in context of bad decision making on credit dispensation or other business environmental changes. In light of such a strong argument the present formula of calculating the efficiency ratio looks like faulty hence cannot be made basis to discuss the deployment or wage discussion of human resource employed in the industry.
(The author is Secretary Gen JKBOF)
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