Financial Daily from THE HINDU group of publications
Monday, May 13, 2002
Money & Banking - Interest Rates
Government - Policy
Maintaining interest rate on deposits: Detail investment plan to justify 9.5 pc, EPFO told
NEW DELHI, May 12
THE Finance Ministry and the Employees Provident Fund Organisation (EPFO) appear to be on a collision course with the Ministry putting the onus on the organisation to come up with investment options, which would guarantee a return of at least 9.5 per cent.
Last month, the Central Board of Trustees (CBT) had proposed to the Finance Ministry that the interest rate on EPF deposits be maintained at 9.5 per cent for 2002-03.
In the Finance Ministry's reckoning, the issue is whether a return of 9.5 per cent can be maintained in a low interest scenario. For instance, the interest rate on SDS has now been cut to nine per cent, while the interest rate on small savings instruments has been reduced to nine per cent.
Besides, the rate of return on 10-year Government securities and also the bonds issued by PSUs and financial institutions in which the provident funds invest have also declined steeply over the last year.
The Department of Economic Affairs (DEA) may not give any more leeway either to the EPF on investments in corporate bonds, given the risks entailed in investments other than in gilts and bonds of PSUs and financial institutions.
The existing investment pattern for EPF stipulates an investment of 40 per cent in government securities, 40 per cent in bonds and securities of public financial institutions and certificates of deposits issued by a public sector bank and the balance 20 per cent can be invested in any of these categories.
Within these categories, the board of trustees, subject to their assessment of risk, may invest up to 10 per cent in private sector bonds or securities having investment grade rating from at least two credit rating agencies.
The decision to recommend an interest rate of 9.5 per cent for the ongoing fiscal was made after the CBT unanimously took the view that it would be sustainable.
According to calculations made by the Labour Ministry, the estimated interest earnings on the EPF would be around Rs 5,745.83 crore for the current fiscal, after accounting for the rate cut in the Special Deposit Scheme (SDS).
Declaring a 9 per cent interest rate on EPF deposits would entail a payment liability of Rs 5,334.34 crore, leaving a surplus of around 411.49 crore. However, if the interest payable on EPF deposits is retained at 9.5 per cent, there would still be a surplus of around Rs 115 crore and there would be no requirement to dip into the EPF's reserves on its interest suspense account, the CBT has held.
The rules of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 also make it clear that while "determining the rate of interest, the Central Government shall satisfy itself that there is no overdrawal of the interest suspense account as a result of the debit thereto of the interest credited to the accounts of the members."
The Finance Ministry reckons that approving the payment of an interest rate of 9.5 per cent on EPF deposits this time around may not set a good precedent even if there is no requirement to dip into the interest suspense account.
"The point we are trying to emphasise is that such a trend may not be sustainable in the near and medium term if the return on investments of EPF monies does not match the interest rate offered to depositors," said a senior Finance Ministry official. A final view will be taken after the Finance Ministry receives a response from the CBT.
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