Mr Jaitley, Depositors Don’t Have a Union, It’s Easy to Take them for a Ride

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010


The finance minister, Arun Jaitley is at it again, demanding lower interest rates. As he said, late last week: “Now, whether domestic savings are only to be used by such instruments which give you a higher return and create an interest regime which is extremely costly and makes the economy sluggish, or higher returns are to be got from such instruments as funds, bonds, shares.”

Jaitley further said: A lot of them have also an element of secured investment in them which can give people a very respectable return itself.”

Normally, Jaitley’s statements on interest rates  in the past have been as straightforward as, I demand lower interest rates. But this time around, he has made a long and a convoluted statement, which basically means the same.

So what Jaitley is saying here is that people save money with banks. The interest rates on bank fixed deposits are high. Given that interest rates on bank fixed deposits are high, the interest rates on bank loans are high. Since interest rates on bank loans are high, people and companies are not borrowing, and this makes the overall economy sluggish.

Hence, people should be investing their money in mutual funds, bonds and shares that finance projects and economic activity.

This is what happens when people make statements without looking at numbers. In fact, growth in retail lending carried out by banks in 2015-2016, has been the highest since 2009-2010. So clearly retail lending is growing at a very robust pace. The so called high interest rates on bank lending, clearly hasn’t had much of an impact on this front.

DatesRetail lending growth
March 20, 2015 to March 18, 201619.40%
March 21, 2014 to March 20, 201515.50%
March 22, 2013 to March 21, 201415.50%
March 23, 2012 to March 22, 201314.70%
March 25, 2011 to March 23, 201212.90%
March 26, 2010 to March 25,201117.00%
March 27, 2009 to March 26, 20104.10%
Source: Sectoral Deployment of Credit Data, RBI


The problem has been in bank lending to industry. The lending growth to industry in 2015-2016 slowed down to around 2.7 per cent. In comparison, it grew by more than 23 per cent, during the go go years between 2009 and 2011. But a lot of that lending was to crony capitalists.

Banks have not been lending to industry, because of all the bad loans that they have accumulated on the lending to industry, in the past. Also, many corporates continue to be heavily leveraged, even though things did improve a little in 2015-2016.

As the RBI Financial Stability Report released in late June points out: “An analysis of the current trends in debt servicing capacity and leverage of ‘weak’ companies [defined as those having interest coverage ratio (ICR)<1]was undertaken…[It] indicated some improvement in 2015-16. The analysis shows that 15.0 per cent of companies were ‘weak’ in the select sample as at end March 2016, compared to 17.8 per cent in March 2015. The share of debt of these ‘weak’ companies also fell to 27.8 per cent of total debt in the second half of 2015-16 from 29.2 per cent in the second half of 2014-15. However, the debt to equity ratio of these ‘weak’ companies increased to 2.0 from 1.8.”

Interest coverage ratio is the ratio of the earnings before interest and taxes of a company during a period divided by the interest that it needs to pay on its accumulated debt during the same period. This basically reflects the ability of the company to finance its debt. An interest coverage ratio of less than one basically means that the company is not making enough money to be able to repay the interest on its accumulated debt.

The RBI categorises these companies as weak companies. The proportion of these companies fell to 15 per cent as on March 31, 2016, in comparison to 17.8 per cent earlier. Nevertheless, these companies still had around 27.8 per cent of the total bank debt. Further, their debt to equity ratio deteriorated to 2 from 1.8.

Given that many companies continue to be highly leveraged along with the fact that they are not making enough money to be able to service their accumulated debt, it is but natural that banks do not want to lend to these companies.

The purpose of any bank is not to get the economy going by lending. It is to lend money to customers who are likely to return it. At the same time, they need to charge an adequate rate of interest, which basically takes the credit risk (or the chances of a default) of customers into account.

Also, Jaitley’s statement seems to suggest that corporates are just waiting to borrow money and expand. And the high interest rates of banks are stopping them from doing so. The data clearly suggests otherwise.

As per the Order Books, Inventories and Capacity Utilisation Survey (OBICUS) survey carried out by the RBI, for the period October to December 2015, the capacity utilisation of 1,058 manufacturing companies which responded to the survey, stood at 72.5 per cent. This was slightly better than the period July to September 2015, when it had stood at 71.4 per cent.

But on the whole capacity utilisation continues to be low. More than one fourth of manufacturing capacity is still not being used. In fact, the situation is even worse than this in some sectors. As Manasi Swamy of the Centre for Monitoring Indian Economy points out in a research note titled Why should manufacturers invest more?: “Large manufacturing industries like cement, steel, sponge iron and aluminium worked at an estimated capacity utilisation of 65 per cent or lower in 2015-16. Automobile companies too have enough capacity to meet any increase in demand. The passenger cars industry is running at 63 per cent capacity utilisation level, two-wheelers at 76 per cent, commercial vehicles at as low as 37 per cent and tractors at 63 per cent. Capacity utilisation levels in industries like paper and textiles are also quite low.”

Over and above this, the return on capital employed for the manufacturing sector has fallen from 11.7 per cent in 2006-2007 to 3.8 per cent in 2014-2015, Swamy points out. In this scenario it is safe to say that industry is also not interested in borrowing more to expand. They may welcome lower interest rates because that will help them service their existing debt in a better way. But that is another issue altogether.

Also, Jaitley seems to suggest that investing in stocks and mutual funds leads to entrepreneurs being able to raise capital. This doesn’t hold true anymore. Public issues these days are basically about investors trying to sell out their stakes in companies. It is rarely about entrepreneurs funding expansion by selling shares. These investors can be venture capitalists, private equity firms or even the government.

Further, banks raise deposits to give out loans. And these loans are also helpful for the economy. If retail lending is growing at close to 20 per cent, it is benefiting vehicle companies, consumer durable companies, as well as real estate companies. What about that? How is that not helping the economy?

Also, the basic question that Jaitley needs to answer is that if the Indian economy grew by 7.6 per cent in 2015-2016, how is the economic growth sluggish? The finance minister cannot have it both ways. When he wants to project the government in good light he says, India is the fastest growing major economy in the world. When he wants lower interest rates and show the RBI in a bad light, he says the economic growth is sluggish.

Another point I wanted to make is that the government can play a huge role in bringing down interest rates further. Currently, the difference between fixed deposit interest rates and the interest rate offered on post office small savings schemes is anywhere from 40 to 160 basis points. One basis point is one hundredth of a percentage. Banks compete with post office schemes when it comes to taking on deposits and cannot keep cutting interest rates on deposits beyond a point.

Further, I think Mr Jaitley must clearly not have forgotten all the ruckus that was created when the government tried to cut the interest rate on the Employees Provident Fund(EPF) by 5 basis points to 8.7 per cent. This would have meant that contributors to the EPF would have got a lower interest of Rs 50 less per lakh, during the course of the year. To break it down further, it would have meant a lower interest of Rs 4.5 per month per lakh, for those who contribute to the EPF. The government couldn’t even push this through.

The current interest rate on EPF is 8.8 per cent. This is close 100-180 basis points higher than the interest rate on fixed deposits, without taking into account that interest rate on fixed deposits is taxed, whereas interest on EPF is tax free. Why should there be such a huge difference in interest rates? How about some fairness on this front Mr Jaitley?

Of course, those who contribute to EPF are an organised lot and can create a lot of hungama if the government decides to cut the interest rate. The same cannot be said for a normal depositor who is placing his money in the bank in the hope that it grows in the years to come. The depositors do not have a union and hence, it’s easy to take them for a ride.

The column was originally published on the Vivek Kaul Diary on July 13, 2016


Why are People So Touchy About EPF


There has been a lot of drama surrounding the changes that the Narendra Modi government has tried to introduce in the Employees’ Provident Fund(EPF) in the recent past. It started with the government trying to tax the EPF.

In the budget speech made in February, 2016, the finance minister Arun Jaitley said: “I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016.”

Just the word tax was enough to get the protests going. The social media went berserk. And so did television channels as well as newspapers, protesting vehemently against this move.

In clarifications that followed the actual plan of the government came forth. The change actually applied only to private sector employees who earned more than the statutory wage of Rs 15,000 per month.

If these employees chose to withdraw 100% of their EPF corpus, 60% of the corpus created after April 1, 2016, would be taxable. Further, there was a
around it. As the clarification later issued by the finance ministry pointed out: “It is expected that the employees of private companies will place the remaining 60% of the Corpus in Annuity, out of which they can get regular pension. When this 60% of the remaining Corpus is invested in Annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.

The clarification did not help. The protests continued and the proposal to tax EPF was then withdrawn.  All this is well known by now. The question I want to ask here is, what led to the people protesting as vehemently as they did?

The middle class in this country is not known to protest against anything. They generally get around to accepting most things over a period of time. So what happened here? The answer perhaps lies in what behavioural economists refer to as the phenomenon of loss aversion.

And what is loss aversion? As economist Robert H Frank writes in his new book Success and Luck—Good Fortune and the Myth of Meritocracy: “[The] sense of entitlement to the fruits of one’s labours may owe much to the phenomenon known as loss aversion. One of the most reliable findings in behavioural economics loss aversion refers to the fact that people will fight much harder to avoid a loss than they would to achieve a gain of the same amount. Since most…people work hard for the money they earn, it feels like they own it, and that makes taxation feel like theft.

And this precisely what explains all the protests that erupted against the government trying to tax the EPF. While protests in this case were justified, what followed was uncalled for.

Before trying to tax the EPF, the government had put out a notification on February 10, 2016. As per this notification an individual investing in EPF could withdraw only his contribution made to the EPF and the interest accumulated thereon, in case he was unemployed for a period of at least two months.

Before this notification was issued 100% withdrawal was possible. Further, those who changed jobs also withdrew 100% of their accumulated EPF. All they had to do was to declare that they were unemployed. This wasn’t a healthy phenomenon given that money invested into EPF is essentially being put aside for retirement.

The Employees’ Provident Fund Organisation(EPFO) was not structured to be able to keep track of individuals changing jobs. The introduction of Universal Account Number(UAN) along with the February notification, made it impossible for those changing jobs to withdraw 100% of EPF. And this was a good move.

But there were huge protests against this as well. And the government had to withdraw this notification. In fact, this happened primarily because people saw this as another attempt of the government to play around with their EPF and loss aversion kicked in.

In fact, the media created confusion around the question, by asking questions like why an employee should not be allowed to withdraw money for weddings, education of their children, building/buying a home and medical emergencies.

Take the case of an editorial that appeared in The Times of India on April 21, 2016. It asked: “People may need to withdraw from EPF to tide over a situation when they are between jobs. Or they may want to build a house. Or they may face a medical emergency. In all these cases EPF withdrawals enhance their economic security, which was the core idea behind EPF. There is no case, therefore, for debarring such withdrawals.”

This gave the impression that no withdrawal from EPF was possible anymore. This was totally wrong. Those unemployed could withdraw their contribution to the EPF as well as the interest accumulated on it.

Further, the EPF already had rules for money to be withdrawn for medical emergencies, housing, education as well as weddings. These rules were not fiddled around in the new notification issued on February 10, 2016.

The Section 68K of the Employees’ Provident Fund Scheme 1952, allows an individual to withdraw up to 50% of his contribution and the interest accumulated thereon, “for his or her own marriage, the marriage of his or her daughter, son, sister or brother or for the post-matriculation education of his or her son or daughter.”

As far as medical emergencies are concerned, the amount that can be withdrawn from the EPF should not exceed, the individual’s “basic wages and dearness allowances for six months or his own share of contribution with interest in the Fund, whichever is less.” Withdrawal is allowed for buying/building a home as well.

After hungama around this move ended, the government decided to cut the interest rate on the EPF for 2015-2016 to 8.7%. This was 10 basis points lower than the 8.8% recommended by the Central Board of Trustees(CBT) of EPFO. Further, it was 5 basis points lower than the interest of 8.75% paid in 2014-2015 and 2013-2014.

This means that the interest paid in 2015-2016 would have been Rs 50 per lakh lower than what was paid in 2014-2015. This is a very small amount. But there were protests against this move as well, primarily by trade unions.

The explanation for this again lies in loss aversion. People now believe that the government is trying to play around with their hard earned money. And any small change attempted on part of the government is likely to lead to protests.

These protests finally led to the government reversing its earlier decision and deciding to pay an interest of 8.8% on EPF for 2015-2016, as recommended by the CBT.

The question that crops up here is, what economic reforms can be expect from a government which isn’t even in a positon to pass on an interest rate cut of 5 basis points (from 8.75% in 2014-2015 to 8.7% in 2015-2016).

Further, the government could have handled the situation better by at least trying to explain the logic behind its moves. But that doesn’t seem to have happened and it has ended up with creating needless trouble for itself.

The column  originally appeared in the Vivek Kaul Diary on May 2, 2016

EPF issue: Why protests against rate cut show cussedness of trade unions


The interest on the Employees’ Provident Fund(EPF) for the year 2015-2016 has been set at 8.7%.

The Central Board of Trustees(CBT) of the Employees’ Provident Fund Organisation(EPFO) had proposed an interest of 8.8%, when they had met in February earlier this year. The ministry of finance finally decided on an interest rate which is 10 basis points lower at 8.7%, than what the Trustees of EPFO had proposed. One basis point is one hundredth of a percentage.

This hasn’t gone down well with the trade unions and they have decided to protest. Bhartiya Mazdoor Sangh (BMS), the trade union closest to the ruling Bhartiya Janata Party, given its affiliation to the Rashtriya Swayamsevak Sangh(RSS), has decided to hold protests across the country.

As its general secretary Virjesh Upadhyay told PTI: “BMS strongly condemns the cut in EPF interest rates and will hold demonstrations at EPF offices on April 27,” Sangh general secretary said, adding, the Fund is managed by the Central Board of Trustees (CBT), an independent and autonomous body.”

Other trade unions have also come out strongly against the move. But the entire thing is quite bizarre. The question is what are they protesting about? It seems the ministry of finance’s decision of cutting down the interest rate offered by 10 basis points to 8.7%, from the 8.8% proposed by the CBT of EPFO, hasn’t gone down well with the unions.

As AK Padmanabhan, board member of the CBT of EPFO and the president of Centre for Trade Union Congress told The Indian Express: “It’s unusual that after the CBT recommendation, the finance ministry has decided to cut interest rate.”

Maybe, the move is unusual, but are the trade unions also totally jobless? Allow me to explain. How much difference does the 10 basis point cut actually make? On a corpus of Rs 1 lakh, it makes a difference of Rs 100.

Also, the interest rate paid on EPF in 2014-2015 and 2013-2014 was 8.75%. In comparison to that, the interest for 2015-2016 will be lower by Rs 50 per lakh.

Is it worth protesting on something like this? What are the trade unions actually trying to achieve by doing this? Or since they are trade unions, they need to protest against everything?

Also, don’t the trade unions know that 8.7% interest being paid on EPFO, is the highest interest rate being offered by the government across all its schemes? It is sixty basis points more than the 8.1% per year interest currently being offered on the Public Provident Fund and the National Savings Certificate(NSC).

It is ten basis points more than the 8.6% on offer on the Senior Citizens’ Savings Scheme and Sukanya Samriddhi Account Scheme. Even the senior citizens who typically get paid more otherwise, are being paid lower than the interest being paid on EPF. So what are the trade unions protesting about?

The government is trying to move the country towards a lower interest rate regime. Fixed deposit rates are down by more than 100 basis points in the last one year. In comparison, the EPF interest rate has been slashed by just 5 basis points. Further, interest earned on fixed deposits is taxable. Interest earned on EPF is not.

If all these reasons are taken into account, the planned protests of the trade unions essentially look very hollow.

Also, what is the government trying to achieve by cutting the EPF interest rate by 10 basis points? In an ideal world, the government would have wanted to cut the EPF interest rate much more, to bring it in line with the other prevailing interest rates. But given all the hungama that has recently happened whenever the government has tried to bring any change to the EPF, it basically wasn’t in the mood to take on any more risk.

Having said that a 10 basis point cut in the EPF interest rate essentially achieves nothing.

Further, it needs to be asked, why a provident fund as big as EPF is, is not professionally managed? As on March 31, 2015, the EPFO managed funds worth Rs 6.34 lakh crore in total. Provisional estimates suggest that in 2015-2016, the EPFO saw Rs 1.02 lakh crore being invested in the three schemes that it runs. Of this around Rs 71,400 crore was invested in the EPF. This means as on March 31, 2016, the EPFO managed funds worth Rs 7.36 lakh crore in total.

This is a huge amount of money. The question is why is this money not being professionally managed. The CBT of EPFO essentially comprises of the labour minister, a few IAS officers, a few businessmen and a bunch of trade union representatives. Which one of these categories of people has some the expertise to manage investments?

Further, why does a committee need to meet to decide on an interest rate for EPF? Why can’t it simply be declared on the basis of returns on the investments made? Why can’t returns on EPF investments be declared on a regular basis? Why is there so much opaqueness in the entire process?

The only possible explanation is that if things do become transparent, then the trade unions controlling the CBT of EPFO, will essentially become useless. When it comes to transparency, it’s the same story everywhere.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on April 26, 2016

The PF problem: Why the govt is after your EPF money


The Narendra Modi government has tried initiating a few changes to the way the Employees’ Provident Fund(EPF) operates. And this hasn’t really gone down well with those who have accumulated their savings through EPF.

These moves are in line with what the finance minister Arun Jaitley referred to as “measures for moving towards a pensioned society,” in his February 2016, budget speech.

One such move has been the restriction on the complete withdrawal of EPF. In a notification dated February 10, 2016, the government had specified that an individual investing in EPF can withdraw only his contribution made to the EPF and the interest accumulated thereon, in case the individual is unemployed for a period of at least two months.

Up until now, a 100% withdrawal was possible. In fact, given the way the Employees’ Provident Fund Organisation(EPFO) operated, one could withdraw 100% of the accumulated EPF even at the point of changing jobs. All an individual had to do was to declare that he or she was unemployed.

This loophole has now been plugged in with the introduction of the Universal Account Number(UAN). Earlier, the EPFO could not track the movement of an employee from one job to another, but with UAN that is possible.

In fact, with the new notification, premature withdrawal of 100% EPF corpus would become impossible. Further, the notification also increased the retirement age from 55 years to 58 years.

The change of not allowing to withdraw the full EPF, is in line with what Jaitley had talked about in his budget speech. The idea is to discourage individuals from withdrawing their accumulated EPF corpus. By doing this, the hope is that the individual will have enough money going around when he or she retires.

And at that point of time, the accumulated corpus can be used to generate a regular income after retirement i.e. a pension.

These changes haven’t gone down well with people who contribute to the EPF every month and there have been protests against it. Given this the notification specifying the changes has now been put in abeyance. As the labour minister Bandaru Dattareya told reporters today (April 19, 2016): “The notification will be kept in abeyance for three months till 31 July, 2016. We will discuss this issue with the stakeholders.”

In fact, a PTI news-report also points out that the labour ministry is contemplating allowing withdrawal of 100% of the corpus on grounds like marriage and education of children, purchase of house, serious illnesses etc.

The way the scheme is currently structured, it does not allow a 100% withdrawal for such things. The Section 68K of the Employees’ Provident Fund Scheme 1952, allows for withdrawal of up to 50% of the individual’s contribution and the interest accumulated thereon, “for his or her own marriage, the marriage of his or her daughter, son, sister or brother or for the post-matriculation education of his or her son or daughter.”

As far as medical emergencies are concerned, the amount that can be withdrawn from the EPF should not exceed, the individual’s “basic wages and dearness allowances for six months or his own share of contribution with interest in the Fund, whichever is less.”

News-reports suggest that these limits are likely to be withdrawn in the days to come. If something like that happens, it won’t be good for the society as a whole. The basic idea behind any provident or pension fund is to accumulate enough money so as to be able to live comfortably after retirement.

But if 100% withdrawals are allowed then this will not be possible. Hence, some withdrawals should be allowed, but allowing 100% withdrawals for weddings and education etc., is clearly not a great idea.

This did not matter earlier when people lived in joint families. But in the era of nuclear families and increasing life expectancy, it is important that those retiring from jobs have enough money for themselves.

Further, it needs to be pointed out that the current norms allow 100% withdrawal “on termination of service in the case of mass or individual retrenchment”. Of course, one is quitting the job to become an entrepreneur then a 100% withdrawal is not allowed. But big government schemes cannot be so flexible so as to meet the needs of everyone.

Anyone leaving the country is also allowed to withdraw 100% of the accumulated corpus. Further, those suffering from “total incapacity for work due to bodily or mental infirmity” can withdraw 100% of the corpus. So, the point being that the scheme is flexible “enough”.

Also, as a recent government clarification on the EPF pointed out: “The main category of people for whom EPF scheme was created are the members of EPFO who are within the statutory wage limit of Rs 15,000 per month.”

Hence, for those earning greater than Rs 15,000 per month and looking for the flexibility with their money, should essentially be negotiating with their employers to make a minimum contribution to the EPF and receiving their salaries under other heads.

To conclude, it is safe to say that the Modi government has essentially botched up the entire idea behind a pensioned society. Almost no effort has been made in order to explain the basic idea behind the phrase, which is actually a good one.

For a government which is pretty good at marketing itself that is rather ironical.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on April 20, 2016

All You Wanted to Know About Restriction on EPF Withdrawal



This is one of the changes that I should have written about at least five-six weeks back, but somehow I did not. Nevertheless, given the long term impact of this change, it’s still not very late to discuss it.

From February 10, 2016, onwards, the government has restricted the total amount of money that any contributor to the Employees’ Provident Fund can withdraw. As the government notification points out: “The Central Board, or where so authorised by the Central Board, the Commissioner, or any officer subordinate to him, may on an application made by a member in such form as may be specified, authorise payment to him from his provident fund account not exceeding his own total contribution including interest thereon up to the date the payment has been authorised on ceasing to be an employee in any establishment to which the Act applies.”

The notification further points out: “The member making an application for withdrawal under sub- paragraph (1) shall not be employed in any factory or other establishment, to which the Act applies, for a continuous period of not less than two months immediately preceding the date on which such application is made.

So what does it mean? It basically means that anyone who has been unemployed for two months or more can now withdraw only his own contribution into the Employees’ Provident Fund and the interest that has accumulated on it.

The employer’s contribution and the interest that has accumulated on it thereon, can only be withdrawn at retirement i.e. at the age of 58. The age of retirement has also been increased from 55 to 58.

This change does not apply to “female members resigning from the services of the establishment for the purpose of getting married or on account of pregnancy or child birth.”

Earlier the entire corpus that had been accumulated under the EPF could be withdrawn. And if the corpus had accumulated for five years or more, it was even tax-free.

This was a loophole used by many individuals to withdraw their entire accumulated EPF corpus at the point they changed their jobs. All it needed was a declaration that they were unemployed. The Employees’ Provident Find Organisation(EPFO) had no way of verifying this.

Of course, the move by the government to clamp down on total withdrawal of EPF, comes on account of individuals withdrawing their entire EPF corpus when they changed their jobs. This withdrawal led to people not building a good retirement corpus. If viewed from this angle, this is a good move.

It will help individuals build a good retirement corpus. Also, with only partial withdrawal allowed, it will encourage individuals to transfer their EPF accounts when they change jobs, instead of simply declaring that they are unemployed and withdrawing their contribution to the corpus.

Anyone who understands the power of compounding will know that this is a good move, given that as the corpus grows the compounding has a greater impact. An interest of 8% on Rs 1 lakh amounts to Rs 8,000. But the same interest on Rs 5 lakh amounts to Rs 40,000. A bigger corpus in case of EPF is only possible when employees transfer their EPF accounts when they move jobs.

Also, what happens to people who are actually unemployed and can only withdraw the employer’s contribution to the EPF and the interest accumulated on it, only after the age of 58?

In fact, as I write this, the EPFO has made a decision to give interest on inoperative EPF accounts. These are essentially accounts in which no contribution has been made by the employee or the employer for a period of 36 months. Hence, what this means is that an individual who is facing long-term unemployment and cannot withdraw a part of his EPF corpus, will continue to earn interest on the corpus that he cannot withdraw.

This was not possible earlier. This change had to be made given that if the government does not allow people to withdraw their entire EPF corpus, it should at least be paying interest on the part of the corpus that cannot be withdrawn.

But all this is just one side of the coin. What happens in case of individuals who actually lose their jobs and face long-term unemployment? In this day and age this is possible. Even though they have money in the form of the employer’s contribution to the EPF, and the interest earned on it, they cannot withdraw it.

This may force them to borrow money from money lenders. Hence, it is not fair on them. The trouble is that the EPFO up until now has had no way of verifying if the individual withdrawing the corpus is actually unemployed or is simply changing jobs. This is a weakness at the level of the EPFO.

Given the information technology infrastructure available these days, it shouldn’t be so difficult to figure out whether the individual is actually unemployed or is simply moving jobs. Let’s say the individual withdraws the entire corpus accumulated under EPF and then takes on another job, his permanent account number(PAN) continues to remain the same. So how difficult is it for the EPFO to figure out whether the person has actually changed jobs? Not very.

Other than people facing long-term unemployment, these days some individuals also like to take a break and go back to studying, in order to improve their job prospects. The money that they have accumulated under EPF can help in paying the part of the fee. People going back to studying at the age of 25-30 are really not thinking about retirement, they are thinking about improving their job prospects by studying more. And if they study more, their job prospects are likely to be better in the years to come.

The EPFO needs to be flexible on this front. A better information technology infrastructure can clearly help.

Also, I think we are reaching a stage, where people who are in a position to manage their money, need not depend on EPF. They need to negotiate with their organisations to have a minimal contribution made to their EPF and the remaining money be paid out to them as a part of their normal salaries, which they can then invest in order to save tax as well as accumulate a corpus. It will also ensure that a portion of their corpus is not stuck with the EPFO until the age of 58. Organisations which are looking to retain talent also need to be flexible on this front.

But given how HR departments in organisations work, I clearly don’t see this happening.

The column originally appeared on Vivek Kaul’s Diary on March 31, 2016.