Finance Ministry Wants To Reduce Provident Fund Interest Rates, EPFO Says It Will Stick To 8.65%
The Ministry of Finance has asked the Employees' Provident Fund Organisation (EPFO) to reduce the 8.65 per cent annual return it has announced to offer about 85 million employees.
The reason is that the yield may not be justified given the fund’s performance, but two officials with knowledge of the discussions said the bigger factor for objecting EPFO's proposal is concern that the high return would hurt the economy by reducing banks’ ability to lend at attractive rates. "But with inflation around 3 percent, the yield is appealing to those who want to save and is forcing banks to keep their savings deposit rates at similar levels, the officials said. There are also fears that banks will lose deposits to the fund," officials familiar with the development told Reuters.
The Finance Minister also fears that if it agrees to give 8.65 per cent return, banks will lose deposits to the fund. This comes as a massive setback for borrowers, including small businesses, who are having to pay double-digit loan rates in an economy that is slowing and where their power to raise prices is constrained. A senior labour ministry official said that the concerns of the finance ministry would be considered and the issue soon resolved.
As of now, there has not been any official announcement made by the Finance Ministry on the issue. The hike announced by EPFO is one of the most rewarding savings schemes. In 2018, the average interest rate of the PPF (Public Provident Fund) and NSC (National Savings Certificate) was 7.7 per cent.
In the memo, a Finance Ministry official tells a counterpart at the Labour Ministry that the proposed rate of return 'is not in line' with the fund’s rules. Those rules say that the government needs to make sure it does not set an interest rate that is out of sync with the fund’s returns.
“Ministry of Labour & Employment is therefore advised to consider a rate of interest for FY 2018-19 which does not fully utilise the surplus of the previous year and leaves a reasonably higher surplus in the account undistributed,” adding the memo is issued with the approval of Nirmala Sitharaman, the Finance Ministry memo date June 12 read.
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