Riyaz Ahmad Bhat
The efficiency of any business or system has been considered very important in deciding its future operations. This as a key parameter must be measured in a quantified way to examine the progress of a company or a system. In the modern scientific age, the quantification of parameters and their measurement on a scale of rankings and ratios has taken a key position in evaluating performance and suggesting the future roadmap of businesses and systems. One such metric in today’s business operations that has come into existence is the cost-to-revenue ratio (CIR) which describes the relationship between the cost of inputs and the cost of output. This ratio is also known as the efficiency ratio and every organization continuously reviews its business performance in light of this parameter and its future development is also dictated by the quantum of this ratio prevailing at the time of the review. The banking sector in India was no exception to this growing trend and managements were quite quick to modify the review mechanism to suit this trend. In any review, the performance quotient of the bank revolves around the discussion of the efficiency ratio which is seen to give a clear view whether the resources deployed are being used efficiently to their maximum potential or whether wastage is observed in the deployment of these resources. However, it should be kept in mind that unlike other businesses, the bank does not consume the material inputs which are converted into salable products and both can easily be quantified to draw a conclusion in this regard. The banking industry involves complex processes of human effort and technology to provide us with revenue-generating services, so ratios borrowed from the manufacturing sector cannot gauge the performance of this service industry.
The ingredients of the use of services by people and technology must be quantified in a more acceptable and rational way so that industry players do not doubt the formulas calculating this type of ratios. Therefore, it becomes necessary to create a consensus in creating a relationship between the chief revenue generators and the realization of the revenues of the end services so that the acceptability of the efficiency ratio by all the stakeholders is achieved and that the industry progresses by benefiting from the process of evaluating its effectiveness. In the current scenario, when calculating the efficiency ratio, the banks only linked their establishment costs and other operational costs to the revenues and this formula for calculating the efficiency ratio was not acceptable to the banks. various stakeholders in the banking sector, in particular for the staff employed in this sector.
This important actor who contests the current mechanism is represented by the trade unions and considers it as a ploy by the owners of the banks to deprive them of a reasonable revision of their salaries and of an adequate deployment of human resources for work, thus exploiting them to maximize profits.
On the other side, bank managements, while relying on the current formula to calculate efficiency, argued that banks were overstaffed and pursued their idea of having more reach of more mechanization processes in industry. Their way of arguing is based on the common perception that overburdened banks face a constant challenge of increasing payroll, which has been an obstacle to improving efficiency. The figures put forward in this regard are that the World Economic Report on Indian Banks for the year 2020 calculated the average cost to income ratio of 46.8%. In the same breath in 2021, some of the Public Sector Banks (PSBs) in India publicly announced their commitment to reduce the efficiency ratio to less than 50% in 2022 effective at that time. At the same time, some large private banks reported an efficiency ratio of around 40% or less and declared their commitment to reduce it further.
So far the general perception of industry observers regarding the effectiveness of PSOs. Most of them are of the opinion that the very low efficiency of these banks is due to the increase in the wage bill of the organized labor of these banks. The cause of the technological lag of these banks in providing banking services is seen as another factor, which leads to loss of market share for the companies. By this propagation of such a type of perception, supporters of crony capitalism were able to generate a motivated campaign to demonize the unionized human capital of the banking industry. It is a fact that the unions contest the current formula for calculating this cost/revenue ratio and their contestation is based on solid arguments. Their argument is that the failure to include various productive elements in the current formula, by bank managements, seems ill-motivated to put the contributions made by human capital in a bad light while covering up bad decisions by senior management. which have profoundly affected the performance of these banks.
Their argument is entirely defensible that failing to relate accrued income from non-performing assets to establishment and operating expenses robs the ratio of its accuracy. To support their argument, they rely on the views of experts who have advanced the argument that unrecognized income from bad debts has a direct relationship to income. Experts of such thinking consider it because these amounts are the income generated. Here we can point out that the burden of not realizing this accumulated income cannot be related to the efficiency of the input services. The direct relationship of these non-realizable revenues is the risk mitigation performed by senior management in the context of poor decision-making on credit relief or other corporate environmental changes. In light of such a strong argument, the current formula for calculating the efficiency ratio seems flawed and therefore cannot be used as a basis for discussing the deployment or wage discussion of human resources employed in the industry.
(The author is JKBOF General Secretary)