EPFO favours PSBs over RBI, to withdraw surplus funds

Vikas Dhoot

The UPA’s top economy managers have pointed to more aggressive monetary measures and interest rate cuts to prevent India’s growth slowdown from snowballing, especially in light of the rapid decline in inflation in recent weeks. While a cut in repo and reverse repo rates is expected in order to prod banks into lending, public sector banks are about to get a liquidity boost of over $1.25 billion even before the RBI considers a cut in the cash reserve ratio. ?

The country’s largest retirement fund and the second largest non-banking financial institution after the Life Insurance Corporation of India?the Employees Provident Fund Organisation (EPFO)?has decided to withdraw surpluses from its administrative account that have been parked with the Reserve Bank of India (RBI) in a special deposit account (SDA) since 1989.

By March 2008, the surplus in EPFO’s administrative funds was at Rs 4,819.23 crore as reflected in its SDA balance. If you factor in the Rs 704 crore EPFO expects as surplus accruals in its administrative account in 2008-09 and the interest on the SDA balance for this fiscal so far, the total funds at its disposal adds up to a whopping Rs 5,833.5 crore.

With returns on the SDA static at 8% since 2003-04, EPFO is keen to switch these funds to bank deposits that are fetching more attractive returns for longer tenures. ?

Incidentally, from 1952 till 1989, the surplus funds in EPFO’s administrative account were invested in term deposits of the State Bank of India (SBI), its associate banks and other PSU banks. In 1989, when these deposits yielded 10%, the EPFO’s Board of trustees okayed a plan to invest administrative surpluses in the RBI’s SDA, which fetched 12% at the time.

While SDA rates stayed rosy for a decade after that, in 2000, the returns began to dip. Since 2003-04, the SDA has returned only 8%. Meanwhile, interest rates on nationalised banks’ term deposits have been moving up. In September 2008, when the EPFO began examining the idea of moving out of the SDA, SBI was offering 10-10.5% interest on fixed term deposits of 1 to 3 years.

“With the increasing gap in the rate of interest, the funds’ earnings in the SDA is much less that what would have been, had the fund been invested in term deposits of nationalised banks,” a board member told FE.

An internal estimate by the EPFO and the ministry of labour found that the SDA investments would lead to a Rs 129.27 crore notional loss of earnings in 2008-09, when compared to returns on bank deposits. Moreover, the interest on SDA balances is simply credited back (re-invested) into the account.

Drawing comfort from its sister organisation, the Employees’ State Insurance Corporation (ESIC), which has been investing surpluses by calling quotations from banks on term deposit rates every fortnight since 1992-93, the EPFO placed the idea before the Board’s Finance and Investment Committee (FIC) late last month.

FIC’s nod was sought not just for the first step of the plan?withdrawing the accumulations in the SDA?but also to approve the investment of fresh accretions to the administrative surplus into bank deposits right away. The finance panel that includes three representatives each from employers and employees apart from senior ministry and EPFO officials, gave its nod to the idea and have recommended the same for government approval. ?

The process of calling quotations for term deposits and monitoring the investments will be handled by the Investment Monitoring Cell recently set up within EPFO to oversee the operations of the private sector fund managers appointed to invest workers’ savings optimally from this September.

The EPFO’s massive administrative surplus may seem surprising considering the annual tug-of-war seen in the last few years to fund the deficit for politically-set EPF rates.

EPFO charges 4.4% of all PF contributions as administrative charges for running the three schemes under its aegis?the EPF, the Employees’ Pension Scheme 1995 and the Employees’ Deposit Linked Insurance Scheme of 1971. With the number of industries and workers covered under the EPF Act increasing over the years and with wage scales rising dramatically, the surpluses on EPFO’s administrative account have been growing quickly.

Officials expect the withdrawal of funds from the SDA to take some time to materialise. The pay and accounts office in the labour ministry will be instructed to withdraw the balance in SDA along with the accrued interest and hand over the funds to EPFO for placing with banks.