EPFO has found some of its past investments in distressed IL&FS and DHFL this year difficult to recover.
This fiscal New Delhi is likely to cut the EPF interest rate by 15-25 bps: millions of wage earners may soon receive lower returns on their compulsory investment for the fiscal period ending March 31. The Provident Fund Organization of Employees (EPFO) is likely to lower the interest rate offered to its subscribers by 15-25 basis points for this tax, two government officials said on condition of anonymity.
This comes in the wake of EPFO promising its customers an 8.65 percent interest in the fiscal year 2018-19 after it took seven months to persuade the finance ministry of its proposal's feasibility.
The decision also takes place against the backdrop of economic downturn, lower returns on debt market assets, including government securities, and fixed deposits and lower interest rates on similar products, such as public provident funds and private provident funds, which are likely to be factored in when EPFO publishes its interest rate for 2019-20, one of the two officials mentioned earlier.
The retirement fund manager is expected to announce the annual interest rate by the end of January following a series of meetings with its management managers, members of the executive committee and the Central Board of Trustees (CBT), the other official said.
"This year's economic downturn has been visible. The falling debt instruments returns will force the EPFO to downward tinker its payout for 2019-20, "said the first official. "In the last year, the long-term fixed deposits and some bond yields have fallen by between 50 and 90 basis points and these measures can not be overlooked."
According to the first official, two more changes could trigger a rate cut. First, deposits made in small investing instruments such as the school provident fund and the government provident fund currently earn just 7.9 percent interest.
Second, EPFO has found some of its past investments in crisis-ridden shadow lenders Infrastructure Leasing and Financial Services Ltd and distressed mortgage lenders Dewan Housing Finance Corp this year difficult to recover. Ltd. Despite attempts, some 1,300 crore of workers ' capital, deposited directly by the manager of the retirement fund, is trapped with the two firms, Mint reported on August 14.
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Representatives of employees at CBT confirmed that 2019-20 is likely to be a tough year, but said they would push EPFO to maintain the current fiscal return rate of 8.65 percent. "Yes, we know it's a tough year, but we're going to push for an 8.65% EPF payout," said Prabhakar Banasure, a CBT employee representative.
"We are eager to see what the Labor Ministry and EPFO are bringing to the table this year when we meet in terms of their profits."
CBT, headed by the Minister of Labor, is EPFO's supreme decision-making body that oversees a corpus of more than 12 trillion and has an active subscriber base of over 60 million.
CBT, which includes government representatives, employers and employees, reviews the earnings of the retirement fund manager for the year before agreeing on the interest rate of the provident fund that the finance ministry will accept.
Over almost seven months, the finance ministry retained the EPFO payout of 8.65 percent in 2018-19. One of last year's claims was that EPFO was left with a surplus of some 151 crore in 2018-19 after an 8.65 percent allocation, significantly smaller than the surplus of some 5586 crore in 2017-18.
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