The recent Supreme Court judgment providing relief to pensioners of three commercial banks may undoubtedly take a toll on the banks’ financials. But in the long run it will help our banks be more realistic in dealing with their employees.

“In the business of financial intermediation we need to keep our costs in check to be able to offer fair returns to depositors and to lend at affordable rates to borrowers,” says a senior executive of one of the affected banks.

“Anything that adds to our cost will have an impact on our ability to continue to do so.”

Habib Bank, United Bank and Allied Bank’s management are bound to implement the apex court ruling, after the release in late February of the Supreme Court’s (SC) detailed judgment regarding higher payments to affected pensioners.

The state-run National Bank of Pakistan can, for the time being, skip implementation of the apex court ruling as, according to media reports, the SC has accepted its request for the constitution of a larger bench. NBP had moved this application prior to the judgement’s release.

While the financial implication of implementing the apex court verdict would vary, the annual ‘financial hit’ is estimated to be in billions of rupees for each of the three banks. The question is how on earth will the banks manage it?

“Can we go for saving on the cost of deposits? We cannot. The market is very competitive it is difficult to raise deposits at affordable rates. Can we increase lending rates losing sight of the cut-throat competition in the credit market? We will have to. What else can we do?” asks another executive of one of the three banks.

“Perhaps we will also have to cut fresh hiring or decelerate employees’ promotions or cut on executives’ perks to save money. But that can affect the performance of the bank in the long run. We’re really in trouble, more so since profitability is already low and there are many avenues where we need to spend, like fintech and green banking” he laments.

Late last month, a three-member SC bench headed by Chief Justice Mian Saqib Nisar ruled that with immediate effect the minimum pension paid to any of the pensioners (including their widows, where applicable) of UBL, HBL and ABL will be Rs8,000 per month.

The court ruled that the payments will be prospective, that is, from the date of this judgment. It also ruled that every year there will be a 5pc increase in the aforesaid pension.

Executives of affected banks say in the light of the SC judgment, they will pay revised pension to those pensioners whose pension was linked to the basic pay ‘frozen’ category in the past years. But in UBL’s case the judgment will also apply to its retrenched employees, including those who had served for more than ten years on the date of retrenchment, according to the SC verdict.

However, pensioners who availed the Voluntary Separation Scheme or Golden Handshake Scheme of the banks will not benefit from the apex court’s recent judgment in the pensioners’ case.

The Supreme Court’s verdict under discussion brings forth an important aspect of banks’ management-employee relationship. It establishes that it is in the interest of banks to set this relationship right before it is too late. And, it also shows how and under what circumstances banks can find themselves in a difficult situation if certain issues are not addressed on time and in a manner that leaves no legal or regulatory vacuum at all.

Initially all three banks i.e. HBL, UBL and ABL may face difficulties in dishing out extra funds for implementing the apex court’s ruling on the pensioners’ case.

“But in the long run it will help them in a big way if they begin paying pensioners with a big heart,” insists a former executive director of the State Bank of Pakistan.

“Taking good care of pensioners, in the context of bank workers and officers (not executives), means a lot for companies’ current employees.”

Banks are known for usually large gaps between the pay and perks of executives and that of a middle-tier officer and low-tier staff. “Their board of directors can make sufficient changes in policies to narrow such gaps. The SBP has issued elaborate guidelines on governance and remuneration practices that encourage them to do so,” says a senior central banker. “But the central bank cannot and should not dictate the banks on such matters.”

Senior executives of HBL, UBL and ABL say they are busy calculating how much of a ‘financial hit’ they will have to take in implementing the apex court’s judgment on their pensioners’ case, adding that the impact on their books of account would start reflecting from this fiscal year.

They are, however, confident that this not going to hit profitability in a big way as their advances are growing and there is room available for an upward adjustment in lending rates.

Published in Dawn, The Business and Finance Weekly, March 12th, 2018