Presented by: Dr. Neelam Tandon, Dr. Deepak Tandon and Mr.

Reetam Sinha

 The Indian banking system with one of the largest banking networks in the world , has passed through series of reforms over the past few years like the deregulation of interest rates, dilution of the government stake in Public Sector Banks, and the increased participation of private sector banks. With banking industry realising that human resources give them the winning edge, valuing the human capital becomes significant. However, the subjective elements of human capital create difficulties in arriving at objective measures.

 The authors have tried to throw light on the need for human valuation in banking sector by recommending Lev & Schwartz Economic model for the estimation of future earnings during the remaining life of the employee and then arriving at the present HR value by discounting the estimated earnings at the employee's cost of capital. The Return on HR value will assist management to manage the value / commitment better in future years. The HR turnover ratio can also be taken as an indicator of efficiency. It can be concluded that aligning skill sets of human resources by human valuation to process complexity of work situations; influencing the quality of the resource base; and focussing on enhancing supply as opposed to competing within existing supply would be required for sustainability of banking sector in the current scenario.

 Indian Banking has come a long way from inertial and rather routine passive business institutions to highly proactive and dynamic entities. In order to meet the global standards and to remain competitive, banks will have to recruit specialists in various fields such as Treasury Management, Credit, Risk Management, IT related services, HRM, etc. in keeping with the segmentation and product innovation. To institutionalize talent management, the first priority for the banking industry would be to spot, recognize and nurture the talent from within. Secondly, the industry has to attract the best talent from the market to maintain the required competitive edge vis-a-vis global players.

 However, the issue of critical importance is how talent is integrated and sustained in the banks. Therefore, a proper system of human resource accounting has to be put in place by all the banks. The concept of human resource accounting can be basically examined from two dimensions:
(i) the investment in human resources; and (ii) the value of human resources.

The expenditure incurred for creating, increasing, and updating the human resource quality is known as investment in human resources. The yield that the investment in human resources generates will

 Research into true human resource accounting began in the 1960s by Rensis Likert. It defends long-term planning by strong pressure on human resources qualitative variables, resulting in greater benefits in the long run. Economists like Gary Becker S, Lester Thurow, Mincer Jacob, and Schultz T.W., have dealt with the concept of the rate of return of investment in human capital, and reported varying observations. The basic premise of Flamholtz G, the theory of accounting for human resources is:
(i) people are valuable resource of an enterprise; and (ii) information on the investment and value of human resource is useful for internal and/or external Decision-making.

 The original cost model of Brummet R.L., et al suggested capitalisation of the firms expenditure on recruitment, selection, orientation, training and development of people, and treat them as assets for the purpose of human resource accounting. The amounts so capitalised are to be shown in the balance sheet, under the heading human assets, as distinguished from physical assets. The opportunity cost model advocated by Hekimian, Jones gave impetus to assess the opportunity cost of key employees for quantitative base for planning and controlling the activities of human resource function. Lev, Schwartz valued human capital as the present value of the future earnings of the people till retirement.

 The human variables are divided into three categories:

i) Causal variables; ii) Intervening variables; and iii) End-result variables.

The interaction between causal and intervening variables has been shown to affect the job satisfaction, costs, productivity, and earnings. Flamholtz G developed a model to measure the human resource value to the organisation with the help of stochastic process. He considered the movement of employees from one position to another over a time period. The value of human resource as established by Flamholtz is equal to the present value of the future rewards adjusted with the probability of mobility and separation. Rao developed a system of human resource accounting, and illustrated its application in a transport equipment manufacturing concern. The human resource investments are measured through human resource investment sub-system.

 The assets of an organization could be broadly classified into tangible and intangible assets. Tangible assets referred to all the physical assets which could be presented in the balance sheet including deposits, loans and advances, investments in securities, inventories, cash and non- interest income. Intangible assets include the goodwill, brand value and human assets of the bank. Banking industry is a service industry and hence its human asset valuation is a crucial factor for efficient utilization of its resources. Human asset valuation helps to improve human resource management and to provide the links between human resource interventions and financial results. Valuing human capital is a need of an hour in the balance sheets of banks in India. It helps to create internal equity in the bank and manage the workforce better.

 A successful product is developed by using knowledge as a core competence of the bank, which requires people. In service industries the quality of interaction of the customer with the service provider determines the level of customer satisfaction, and customer loyalty the two main drivers of growth and profitability; Despite increasing level of automation, there are limits to the types of customer transactions that can be put through without a human interface. The human interface is the knowledge provider, analyzing and integrating from his data bank of knowledge of various spheres to come up with solution to the customers requirements. Application of employees knowledge in the right way can only lead to customer satisfaction and value addition. The challenge of HR development is not only to produce efficient employees of varied skills and applications but to retain them at a highly motivated level.

 To develop effective talent management strategy to be followed in banks To analyze the current perspective of Human Resource Policies followed in Banks To develop an hypothetical Lev and Schwartz Economic model for measurement of human capital in banking sector

 Lev & Schwartz Model : Lev and Schwartz (1971) proposed an economic valuation of employees based on the present value of future earnings, adjusted for the probability of employees death / separation / retirement. This method helps in determining what an employees future contribution is worth today. According to this model, the value of human capital embodied in a person who is y years old, is the present value of his/her future earnings from employment and can be calculated by using the following formula: E(Vy) = Py(t+1) I(T)/(I+r)t-y T= Y Where E (Vy) = Discounted present human capital value for all individuals in the bank. T = the persons retirement age Py (t) = probability of the person leaving the organization I(t) = annual earnings of employee for the year Y r = discount rate specific to the cost of capital of the bank

 Lev & Schwartz model can be used to gauge the present value of bank employee based on their future earnings, salary along with all the benefits and incremental earnings to be taken into account. The future earnings have to be discounted at the employees cost of capital. The model is based on the concept what gets measured, gets managed and is also useful information of profitability of banking industry as is linked to the value added by the work force. Banks through this model can project the worth of their employees exactly like money, securities and physical capital.

 Categorization of employees with respect to their designation and salary plus highest qualification is important parameter for calculating future earnings at discounted rate. Salary in banks is decided by all banks management body Indian Banks Association (IBA) and all banks employees umbrella organization United Forum of Bank Unions (UFBU). The present salary is based on 9th Bipartite Settlement which was signed on 27.04.2010.

 Clerks: Rs . 4410-215/3-5055-335/3-6060-470/4-7940500/3-9440-560/4-11680-970/1-12650-560/1-13210 JMGS : Junior Management Grade Scale I Rs .10,000470/6-12,820-500/3-14,320-560/7-18,240 MMGS : Middle Management Grade Scale II Rs. 1 3 , 8 2 0 5 0 0 / 1 1 4 , 3 2 0 5 6 0 /10-19,920 MMGS : Middle Management Grade Scale III Rs . 1 8 , 2 4 0 5 6 0 / 5 2 1 , 0 4 0 6 2 0 /2-22,280 SMGS : Senior Management Grade Scale IV Rs . 20, 480560/1-21040-620/5-24140 TEGS : Top Executive Grade Scale VI Rs. 26,620-680/429,340

 Source: Secondary data of bank financials has been taken from Trends and Progress of Banking, Annual Publication of Banking Report 2011 by Reserve bank of India and The financial and HR policies of Bank of Baroda. The case of Bank of Baroda has been taken into consideration. The time period into consideration is of financial year March end 2010 and 2011.

 Quantification of human resource investment and returns expected can be categorized as follows:
Financial Parameters Ratio of interest income to total assets Ratio of net interest income to total assets (Net Interest Margin) Ratio of intermediation cost to total assets Ratio of wage bills to intermediation cost Ratio of wage bills to total expense Ratio of wage bills to total income Ratio of operating profits to total assets Return on assets Business per employee Cost and Returns Returns Returns Cost Cost Cost Cost Returns Returns Returns

 Banks may adopt the basic premises of Lev & Schwartz model for valuing human resources of a company after parallel ascertaining a human organizational inventory to assess the effect of ratio of wage bill to intermediate cost , wage bill to total expenses , wage bill to total income and returns as interest income to total assets to be discounted by cost of capital. Since the attrition rate is higher among public sector banks as compared to private sector banks hence their retirement age factor will vary more than private sector banks. The Weighted Average Cost of Capital is to be calculated taking into consideration the weighted average cost of wage bill to intermediate cost and returns can be in the form interest income to total assets and net interest margin to total assets. Public sector banks have to go for higher discounting value to depict present value of their employees because of higher cost of wage bill to intermediate cost and also cost of wage bill to total income.

Bank of Barodas HR policy objectives are:

To initiate & institutionalise globally competitive HR practices in the Bank in our pursuit to become a Bank of international standards and to become an employer of preferred choice; To put in place relevant HRD strategies and use modern methodologies to undertake organizational renewal; identify and nurture talent, bring about marked changes in the mindset of employees at all levels so as to enhance HR Quality; To create a performance-driven culture and an exciting workplace for the employees To create a pool of entrepreneurial managers and business leaders for future; To inculcate a strong and effective sales and service culture across levels in the organization in order to generate strong stakeholder affiliation; To create a learning organization for employees intellectual growth and creativity; and to re-skill the workforce to operate in digitally enabled modern core banking environment.

 A very strong Organizational Leadership at different levels forms the key link in the Model. These are;
Strategic Leadership - Corporate level Business Leadership - Zonal & Regional level Operational Leadership - Business unit level i.e. branch

The two vital Human Resource sub-systems i.e. HR Planning & Management Sub-System & Competency Based HRD SubSystem shape the very crucial Performance Environment within the Bank which facilitates development of enabling capabilities of people.

 Through proper developmental inputs, Positive Attitude & Right Mindset is created among people. Through proper Communication Medium and an Organizational Culture of sharing, openness, collaboration & confrontation, autonomy etc., people in the organization are facilitated to give their best output (performance). The Model is adequately supported by a suitable Learning Platform, which imparts proper Knowledge and enhances Learning among people (functional, behavioural etc) so that their Competence increases and their potential could be properly leveraged for greater Individual and Organizational Effectiveness. These create proper Employee Motivation, which ultimately facilitates Goal Achievement.

GRADE CHAIRMAN AND MANAGING DIRECTOR EXECUTIVEDIRECTOR SCALE I SCALE II SCALE III SCALE IV SCALE V SCALE VI SCALE VII TOTAL OFFICERS CLERK SUBORDINATE STAFF ON CONTRACT TOTAL

COUNT 1 2 6632 4782 3247 713 213 102 36 15725 15602 7986 3 39313

It is evident that the ratio of clerks and total officers is almost 2:1 as well as the qualification of officers at the post graduate level and higher level is in the ratio of almost 3:1 to qualification standard of clerk in the Bank.

QUALIFICATION PROFILE Employee OFFICER CLERK SUB STAFF TOTAL % GRADUATE 14140 11249 18 25407 64.63 POST GRADUATE 6411 2648 2 9061 23.05 PH D 39 7 0 46 0.12 JAIIB 4058 1387 0 5445 13.85 CAIIB 5377 740 0 6117 15.56

It is evident from the table given above that maximum bank employees of Bank of Baroda are graduates at 64.63% and minimum PH. D at 0.12% also, 39 from officer cadre and just 7 form clerical cadres

 Bank of Baroda has increased its human capital value in following manner: People oriented Deployment, Promotion and selection policies : Bank has formulated and put in place well documented and comprehensive deployment, promotion and selection policies oriented towards identifying the best talent and providing opportunities for fast-track growth and development. Some of the prominent HR policies put in place are
HR Resourcing policy Promotion policy for officers Transfer policy for officers Promotion policies for clerical and subordinate cadre Overseas selection policy

 Talent identification & Grooming programmes:

Various programmes are being run by the Bank for grooming of officers in specialised areas of Credit, Forex, Treasury / Dealing, Wealth Management, for grooming of Branch heads, etc.

Customised Leadership development programmes:

Project Leap: Project-LEAP (Leadership enhancement and appreciation programme) was initiated by the Bank for grooming 300 leaders of the Bank and was implemented during the period 2007-2009. Project Udaan: This is a comprehensive leadership development programme initiated by the Bank covering almost 300 AGMs / DGMS and almost 1200 Branch Heads of Urban and Metro Branches.

HRNes (Human Resource Network for Employee Services): It comprises of four broad modules encompassing different functions:
Oracle Core HR Module, covering all current HR processes in the Bank; Fluous Payroll Module, - centralised payroll, payments of various benefits, perks, welfare schemes, terminal benefits, etc.; Employee Self-Service Module. Oracle Learning Management Module which includes training administration & e-learning; Various E-Learning modules are gradually being put on the system for employees to avail of and undergo these courses.

Employee performance management system : A new Performance Management system has been formulated and implemented for all officers w.e.f. 2009-10 onwards. The new system enables a holistic approach to the issue of managing performance and does not limit to only an appraisal. It starts from performance planning and Goal-setting and takes it forward into performance review discussions, feedback and development. The new system is business-linked, highly objective and fully transparent, with individuals owning and managing their own performance themselves.

 Baroda Sujhav and ideaonline@bankofbaroda.com : Idea channels for eliciting new ideas from employees with structured rewards provisions for the best ideas. Streamlined Induction schedule for all new joinees: Bank has put in place a well-defined and properly structured induction programme, phase-wise for different batches of directly recruited officers, campus recruitees and newly recruited clerks, which is imparted through a mix of classroom and on-the-job training. Role-change programmes and executive development programmes: Executive Development programmes are being regularly conducted for newly promoted senior and top management people in conjunction with leading Business schools like ISB, Hyderabad, MDl, Gurgaon, National Institute of Bank Management, Pune, etc.

 Grooming and etiquettes programmes :Grooming and etiquettes programmes are being conducted for front-line employees and also for employees selected for overseas posting in order to improve their service levels and qualitative interaction with customers and various stakeholders better. SEED (Self efficiency and effectiveness development) programme being run for frontline staff of the Bank in order to improve their service skills and servicing efficiency.

 The Bank conducted 1,544 training programmes in-house (through its network of 12 Training Centres across the country, one IT training center and an Apex Training College at Ahmedabad) and thereby trained 35,843 people during the year. Besides, the Bank also sent around 1,509 employees for undergoing training in various reputed external training institutes of the country and even abroad. The Bank recruited 1,871 Officers in various Grades/Scales (both Generalists & Specialists), 1,131 Clerks and 632 Subordinate staff members, thereby inducting a total of 3,634 new employees in the Bank during the period 2010-11.

 Special efforts were made during the year under review to fulfil the growing aspirations of the employees for faster career progression, thereby, motivating employees for higher productivity.
Promotions of Bank Employees during 2010-11 Sub-Staff to Clerk Clerk to Officer JM-I to MM-II (Officer to Manager) MM-II to MM-III (Manager to Sr Manager) MM-III to SM-IV (Sr. Manager to Chief Manager) SM-IV to SM-V (Chief Manager to Asstt. Gen. Manager) SM-V to TEG-VI (Asstt. Gen. Manager to Dy. Gen. Manager) TEG-VI to TEG-VII (Dy. Gen. Manager to General Manager) 302 519 1001 971 240 70 33 15

 Total Business (Deposit Advances) increased to Rs 5, 34,116 crore reflecting a growth of 28.30%. Gross Profit and Net Profit were Rs 6,981.61 crore and Rs 4,241.68 crore respectively. Net Profit registered a growth of 38.7% over previous year. Credit-Deposit Ratio stood at 86.77% as against 84.47% last year. Retail Credit posted a growth of 33.8% constituting 18.88% of the Banks Gross Domestic Credit in 2010-11. Net Interest Margin (NIM) as per cent of interest earning assets in global operations was at the level of 3.12% and in domestic operations at 3.72%.

 Net NPAs to Net Advances stood at 0.35% this year against 0.34% last year. A slight increase in Net NPA to Net Advances because of overall high rate of inflation and average performance of corporate in India. Capital Adequacy Ratio (CAR) as per Basel I stood at 13.02% and as per Basel II at 14.52%.(Basel II norm is of 9% in India). Net Worth improved to Rs 19,750.63 crore registering a rise of 43.27%. Book Value improved from Rs 378.44 to Rs 504.43 on year. Business per Employee moved up from Rs 981 lakh to Rs 1,229 lakh on year.

Number of employees

39,313Thousands in number

Value of human resources (Business per employee) Total Business Net Profit (Interest earned Interest expended)/ Total Assets= Net Interest Margin Ratio of wage bill to Intermediate cost Net worth Return on Human Resources value ( %) (Business per employee to wage bill to intermediation cost) Education Index for officers at PG level (wrt clerk) Employee Cost/ Human Resource value (%)

13.58 crore 5,34,116 crore 4,241.68 crore 3.72% 65.37% 43.27% 21.11%

142.10 4.8%

It is assumed that retirement age of all employees is 60 years as per banking norms.

 Bank of Baroda reported significant benefits due to the early adoption of HRA. It is felt by the board of directors of Bank of Baroda that by adding HRA , the bank could determine whether its human asset was appreciating over the years or not. This information was important for the bank as its success depended on knowledge and efficiency of employees. In addition, the bank could also use this information internally to compare the performance and productivity of employees in various departments.

 The HR value per se throws valuable insights into the HR strategy of the firm. On one hand, it is a value of the employees of the company and from the managements perspective is the future commitment which the firm has to pay to its employees for the career span in the company. Thus, a high or low HR value will have to be justified with the returns it can achieve. Hence the return on HR value should be the efficiency measure of human resources on a year to year basis. The return on HR value factor will assist management to manage the value / commitment better in future years. The HR turnover ratio can also be taken as an indicator of efficiency.

 Banks can also make a conscious move to capture its costs related to HR department by developing a human resource accounting system which complements the HR valuation exercise. The system can provide cost clarity in all relevant areas related to the human resources of the company. It can be concluded that automation, favorable economic environment, net interest margin, return on assets, non interest income cannot be the only parameters of profitability. It is because it only measures the past and cannot predict about future. But banks should determine employees contribution to profitability and lifetime value each year, and also compute potential lifetime value of the employee.

For the valuation of the human capital on Year on Year Basis banks need to consider following prime parameters: Categorization of Employees on the basis of employees tenure and skill required for a specific job profile. Value of human resources (skill based depending on the portfolio and competency of the employee generating returns for the bank after discounting employees cost of capital also weight to be assigned to each level of competency for each department of the bank i;e treasury, I.T , customer relations retail and risk management .

 Total Income (interest income + non-interest income) in terms of contribution of the employee during the tenure of the employee on a particular job portfolio Total employee cost (training +compensation and other components of operating cost) Value added by employee excluding increase/decrease in returns due to macroeconomic factors. Net profits excluding diversification (example decrease in transaction cost due to branchless banking -technological advancement)