BackEPFO revives commercial bank proposal
The provident fund body hopes the proposed Workers' Bank will help it expand investments, increase earnings and improve subscribers' engagement with the organization
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The Employees’ Provident Fund Organisation (EPFO) has revived a four-year-old proposal to start a commercial bank despite concerns whether the retirement fund manager has the ability to do so.
EPFO, which is currently evaluating the proposal, hopes the proposed Workers’ Bank will help it expand investments, increase earnings and improve subscribers’ engagement with the organization, which manages a corpus of over ₹ 6 trillion and has an active subscriber base of more than 42 million.
EPFO, which functions under the labour ministry, may soon send the proposal to the finance ministry for consideration although the Reserve Bank of India (RBI) suggested when the proposal first came up in 2011 that such an option may not be feasible.
The Workers’ Bank is proposed to be modelled on Members’ Equity Bank, Australia, which is supported by the Australian Council of Trade Unions.
According to two government officials familiar with the proposal and labour ministry documents reviewed by Mint, the commissions and service charges that are now paid to banks by EPFO can be used as working capital once the proposed bank is up and running.
Some members of the central board of trustees (CBT) say such a bank will receive contributions from subscribers and charges from employers. It can also manage its growing corpus instead of going to third-party portfolio managers. Instead of withdrawals, the bank can provide repayable loans to EPF subscribers. It can also provide personal loans to members based on their EPF balance, according to an EPFO document.
According to the document dated 19 July 2011 and placed before EPFO’s central board meeting on 19 December 2014, starting a bank with EPF money may be ideal in meeting the requirements of workers, besides providing an avenue for deploying EPF funds profitably.
“Such a proposal was initially discussed during 2010-11. An expert committee comprising an RBI representative, though, had suggested that such a proposal may not be feasible. But situation has changed between 2011 and 2014 and the proposal along with the expert group’s view was indeed placed before the central board of trustees meeting in December," said one of the two officials mentioned above who declined to be named.
The minutes of the 19 December meeting underlined that the “Board noted the contents of the item", with some members suggesting that Workers’ Bank branches can be online.
“Secretary (labour and employment) said that EPFO may not have the core competence to run Workers’ Bank. However, the suggestions for a Workers’ Bank can be referred for consideration of DFS (department of financial services) based on discussions in CBT" said the minutes of the meeting, a copy of which was reviewed by Mint.
B.N. Rai, president of the Bharatiya Mazdoor Sangh (BMS), a trade union affiliated to the ruling Bharatiya Janata Party, said EPFO was performing bank-like functions, but with help from banks. Why can’t EPFO establish a bank and perform all the functions itself, he asked.
“If they establish a bank, they don’t have to pay services and commissions to banks and portfolio managers. Besides, the current hesitation of investing in stock market can also be taken care of as they can explore it through the Workers’ Bank," said Rai, who was one of the advocates of establishing a bank when he was a trustee on EPFO’s central board.
Rai, who confirmed that the issue was discussed at the December meeting, says the proposal can take shape after more discussions. When asked whether the BJP-led central government will support such a move, Rai said the BMS is in touch with the central government and is hopeful of government support.
Rai said EPFO already has 120-odd offices and the organization is adopting technology in a big way, so infrastructure would not be an issue. The rate of return on EPFO can go up if the organization can invest and manage its own corpus. It won’t cost more than ₹ 1,000 crore to the retirement fund manager to start the bank, said Rai.
However, an expert committee had suggested in 2011 that such a move is “not feasible under current circumstances". Vivek Srivastava, then-deputy general manager in RBI’s department of banking operations and development, had said then: “the idea of setting up of a “Workers Bank" with the intention of generating higher returns for the EPF contributors and meeting few other requirements of the workers, though laudable, has several shortcomings".
He had said that bank licensing in India has a universal character; in other words, no licences are likely to be issued for the purpose of receiving investments, which will be the core activity of the Workers’ Bank. “Fund management can only be one of the objectives of a bank. Hence, redirecting the fund’s attention to the onerous responsibility of owning and managing a commercial bank, fund management may become a secondary concern for the management. This could put the security of the hard earned savings by EPF contributors at significant risk."
“The fund will have to grapple with issues like non-performing assets and debt write-off etc., which would all have a direct bearing on the returns generated and dividend available for distribution among stake holders. Banking business is subject to various risks... in the instant case, intended promoters don’t have core competency in the area of banking and managing a commercial bank," the RBI representative said in his comment. This view was also tabled in the previous meeting.
Rai of BMS is not a CBT member now, but one of his colleagues sits on the CBT board. Rai said the expert committee gave its report without enough discussion and now the CBT members were demanding fresh consultations before sending the proposal to any ministry.
Gautam Bhardwaj, director of the Invest India Economic Foundation, a private think-tank, said that EPFO was set up to put the provident fund and pensions in order and that should be its primary focus.
“The administration still has issues; there are still migration of account problems and they have not done this efficiently for last 60 years. If they have extra energy, they must focus to keep their house in order before thinking of extra-curricular activities," said Bhardwaj.
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