Mumbai, Jan 10
The Employees’ Provident Fund Oragnisation (EPFO) attached to the Union Labour Ministry is likely to reduce the rate of interest on provident fund this month, thus affecting over 8 crore employees throughout the country.
EFPO is likely to announce reduction in interest rate after meetings of its investment officials and executive committee members and the central board of trustees (CBT). The decision comes amid economic slowdown, lower yields for debt market instruments and lower interest rates on similar products including public provident fund and government provident fund.
The rate of interest was upwardly revised to 8.65 percent from earlier 8.55 per cent last year. However now due to resource crunch, it is likely to be reduced by 15-25 basis points for this financial year, well placed sources here said. A basis point is one-hundredth of a percentage point.
Millions of salaried people are required to mandatorily invest in the EPFO. They would earn lower returns for the financial year ending March 31, 2020. EPFO was offering subscribers an interest of 8.65 per cent in 2018-19.
The EPF payout is impacted by 55 to 70 basis points in case interest rates in the market falls a 100 basis point. It is therefore likely that the EPFO would find it difficult to offer 8.65 per cent interest this financial year. The EPFO invests 85 per cent of its annual accruals in debt market and 15 per cent in equities through exchange-traded funds.
The EPFO was left with a surplus of Rs 151 crore in 2018-19 after an 8.65 per cent payout – much less than the surplus of Rs 586 crore in 2017-18.
EPFO had offered an interest of 8.65% in the 2018-19 fiscal after taking seven months to convince the finance ministry of the viability of its proposal.
“The economic downturn is visible this year. The falling returns on debt instruments will force the EPFO to tinker its 2019-20 payout downwards,” the officials said and added that the long-term fixed deposits and some bond yields have gone down by between 50 and 90 basis points in the last one year and one cannot ignore those indicators.”
“Besides, the 10-year benchmark government securities or G-Secs went down between 85 and 90 basis points between January 2019 and January 2020” and that would be a drag on EPFO’s earnings” officials added.
Two more developments could force a rate cut. First, investments made in small savings instruments such as public provident fund and government provident fund are at present earning only 7.9% interest. Second, EPFO this year has found it hard to recover some of its previous investments in crisis-ridden shadow lender Infrastructure Leasing and Financial Services Ltd (ILFSL) and troubled mortgage lender Dewan Housing Finance Corp Ltd (DHFL) (Some of the DHFL directors have already been arrested in connection with multi crore fraud in the Punjab and Maharashtra Cooperative Bank). Despite attempts, about Rs.1,300 crore of workers’ money, invested directly by EPFO,is stuck with these two firms.
CBT, led by the union labour minister, is the apex decision-making body of EPFO, which manages a corpus of over Rs.12 trillion and has an active subscriber base of more than 60 million. It comprising representatives of the government, employers and employees, discusses the EFPO’s earnings for the year before deciding the provident fund interest rate that needs to be approved by the finance ministry.
Employees’ representatives in Central Board of Trustees (CBT) confirmed that 2019-20 is likely to be a tough year, but said they would push EPFO to maintain the 8.65% rate of return for the current fiscal. “ We know it’s a tough year, but we shall push for maintaining 8.65% EPF payout,” said Prabhakar Banasure, a CBT member representing employees. A labour ministry spokesperson declined to offer comments in this regard.