Account at a discount

It is shameful that the Employees Provident Fund Organisation (EPFO) board has decided to pay 9.5 per cent interest on provident fund deposits for 2004-05. The deficit of Rs 716 crore will be met by withdrawing money from the Special Reserve Fund. This is the second time that such a move is being undertaken, the first being in 2003-04 to pay an extra 0.5 per cent golden jubilee bonus. Given that there is no unforeseen emergency for which the fund is being used, this step increases the inherent risk of the organisation. The board has dashed any hopes that better sense may prevail upon its members and that instead of thinking of short term political gain, they might try to create a more sustainable organisation. Paying an interest higher than that earned by the EPFO is a violation of EPF rules and the board has not fulfilled its responsibility of making sure that the organisation followed the norm.

This should set off a warning bell for all those holding money with the EPFO. After all, now that the precedence is set, the demand for 12 per cent will be louder. When basic principles of financial accounting are thrown to the winds, it is foolish to expect anything but trouble. The only people who should feel happy that they are receiving 9.5 per cent interest should be those who are making their final withdrawal. These are the workers retiring this year. Any others — even those holding money in EPFO accounts for a period of 3 to 5 years — should worry. The EPFO could entail bigger problems than US-64 since its kitty is bigger. No ponzi scheme can survive forever. While no one can accurately predict when it will go bust, the possibility of its collapse is high.

To his credit, Chidambaram has said he will not bail the EPFO out. It is, however, intriguing why he announced the 9.5 per cent rate at all, when he could not subsidise EPFO and he did not wish to raise the interest rate on the Special Deposit Scheme. One option is to allow the financial mess that the board is creating to get worse and then to shut down the EPFO. Quite obviously if the EPFO had been a normal financial company or a bank, nobody would have allowed it to get away with the irregularities in accounts and methods that currently plague it. The other option is to bring it under the ministry of finance and make it follow normal principles of accounting. The labour ministry neither has the expertise nor, as we have seen, the mindset to worry about accounting principles. Now that the prime minister’s promise of a 9.5 per cent has been met, his job is to ensure that the savings of four crore members of EPFO are not put at risk.