Voluntary Retirement Scheme in Nepal

Group Members

Maria Abid ButtAnis AhmedAmbreen ZainabSumairaAsher Usman

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Topics to be Covered Case Background Why retrenchment instead of cost reduction via

improved management? Was there adequate planning? How were the sources of resistance addressed? How were staff-reductions targeted? How did the VRS package balance between

attractiveness to employees and cost-effectiveness for the banks?

How did the VRS’s design mitigate the hardship of retrenched employees?

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Case Background Selection, design and implementation of Voluntary

Retirement Scheme. Downsizing in two banks

Nepal Bank Limited Rastriya Banijya Bank

The exercise was supported by the World Bank The World Bank, at the part of Financial Sector Technical

Assistance Project, first funded technical assistance on restructuring the two banks

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1. Why Retrenchment Instead of Cost Reduction via Improved Management? Staffing numbers and the banks’ wage bills were the main

drivers of operating costs Many staff did not have the skills to be competitive banking

sector, and retraining of the new employees was considered unfeasible

The banks lacked strong middle management. Staff manually performed key banking operations and retail

transactions Main operations of the banks were politically micro-

managed

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First of all the raising staffing level is much higher than the volume of business and banks had no more money to compensate the high volume of employees. On the other hand the VRS had only included training and counseling component for outgoing employees in order to facilitate their re-entry into the labor force. But there was very little interest from the workers or from HMGN for these activities and it was stopped. So that was the right decision to retrenchment instead of cost reduction via improved management.

These VRSs, like many others, had the risk of adverse selection, where ‘more productive’ employees tend to leave, while the ‘less productive’ remain.

The managements of the two banks preferred to retain younger employees whom they could later retrain.

2. Was there Adequate Planning?

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3. How Were the Sources of Resistance Addressed? Managers of the VRS in the two banks discussed the VRS

with all levels of staff HMGN also engaged with the banks’ remaining staff

assuring them that following the VRS they could expect to see salary decompression, and better career prospects

No written assurance was given Private shareholders were also to be compensated The share price was to be determined by a committee of

experts

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The union opposition have disrupted the banking operations so they have become the big resistance to apply the VRS. But the managers of VRS have discussed the all story to each level of staff. That was the big logical step to reduce the resistance.

4. How were staff-reductions targeted?

Depending on the nature and volume of work, some departments were proposed to be merged.

Staff members with 20 or more years of service were targeted first

NBL assessed that it required 2,959 of its 5,322 staff. It planned to reduce 2,311 staff via Voluntary Retirement Scheme In the first phase of VRS, 1,458 of the 2,561 employees with 20

or more years of service, submitted applications for the VRS In the second phase of VRS, it considered offering the scheme

to 2131 staff with 15-19 years of service

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How were staff-reductions targeted? (Conti…) RBB’s analysis showed that its staff strength of 5,522 was

50 % higher than what it required to meet operational requirements

The bank planned to downsize 3,093 staff out of which 2,323 employees were expected to opt for the VRS

In the first phase of VRS, 1,350 employees who had completed 20 years or more in the bank, 1,244 applications were received.In the second phase of VRs, will apply to 1578 staff with 15-19 years of service.

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They used the appropriate technique to reduce the staff level in both the banks. They go through two phases. In very first phase, managements of both banks targeted the employees serving 20 years or more.

In the second phase, they targeted employees who was serving between 15 to 19.

5. How Did the VRS Package Balance between Attractiveness of Employees and Cost Effectiveness for the Banks? RBB agreed to add extra years to the service period of

employees below the compulsory retirement age of 58 years

RBB also agreed to pay benefits to workers based on a level one step higher than their current level

NBL agreed to increase the incentive from 15 days per 25 service year and 22.5 days to 20 years of service

In the second phase of VRs, will apply to 1578 staff with 15-19 years of service

The incentive portion of the VRS is the only real additional cost and the benefits are the savings in reduce staff costs each year

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They used the incentive portion which attracted the employee toward the VRS and this incentive portion balanced the cost of two banks through IRR and payback period.

NBL RBB Total

Projected Annual Savings 3,297,297 3,567,568 6,864,865

Projected IRR (in 10 years) 50.5% 54.1% 52.5%

Projected Payback Period (yrs) 1.95 1.82 1.88

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6. How did the VRS’s design mitigate the hardship of retrenched employees? RBB employees chose to receive of VRS’s some amount of

upfront settlement NBL did have a pension scheme employees opted for

gratuity as upfront lump sum payment VRS’s originally included training and counseling

component for outgoing employees in order to facilitate their re-entry into labor force

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