We will try to update all PF accounts within 6 months: Samirendra Chatterjee, PF Commissioner

The finance ministry has given a conditional approval to higher interest rate of 9.5% on employees' provident fund for 2010-11. It wants the Employees Provident Fund Organisation to update the accounts of its 4.73 crore subscribers in the next six months. Central provident fund commissioner Samirendra Chatterjee defends the EPFO's calculations in an exclusive interview with Amiti Sen. Excerpts:

The finance ministry has given a conditional nod to the higher interest rate. How confident are you of meeting these conditions?

We told the ministry that we follow the same practice every year and there is always a time lag (between when the interest rate is declared and when it actually starts accruing). We always go by the total corpus of the fund. As long as we have taken the interest on that corpus into account, it really doesn't matter how many accounts individually are to be updated. We told them what we had done is correct. However, we will definitely try to update all accounts within the next six months as laid down by the ministry.

What if there is a shortfall? Will you adjust it against next year's interest calculations, as laid down by the finance ministry?

There is a lot of misinformation on how we calculate our interest rate, which leads to such unnecessary apprehensions. We calculate interest on PF at the beginning of the financial year to accommodate people who retire during the course of the financial year. First, we take into account the receipt on the interest account for the coming fiscal. It is based on long-term investments we have already made in the past, on which we receive six-monthly interest. So we know what we are going to receive.

Next, we estimate the amount of incoming funds (or fresh deposits) for the coming year that has to be invested. This is based on experience as well as factors such as growth rate of the economy. We also take into account the securities that will mature during the year that will have to be re-invested. Based on the receipts that are expected, we declare an interest rate that will leave some surplus in the interest suspense account. We do not allow the interest suspense account to go negative.

Still, there is some estimation involved. What if it goes wrong?

The estimate involved is not more than 15% of the total interest receipt, which would amount to 1% to 1.5% of the interest rate declared. We are actually very conservative. Even though we anticipate that some interest rate may rise on the bonds to be invested during the course of next year, we take only very conservative estimates.


If your accounting is so sound, how do you explain the Rs 1,731-crore surplus in your suspense account that made this high interest possible?

Over the years, after we had declared the interest rate, we never calculated the actuals since we never faced a problem of deficit. The actuals, as I have already said, could be 1% or 1.5% off the mark. And this had been going on for half a century. We did have shortfall in some years due to a sudden drop in interest rates, but cumulative interest rate differential has always remained positive. This is for the first time we did an analysis of the surplus of each year that would be left over and we discovered the huge amount.

But isn't it a bit unfair that the surplus that might have actually gone to a person who retired long ago is being enjoyed by somebody else?

You are right, but we have to make a beginning somewhere. And anyway, if you look at the surplus that accumulated every year, you will see that the bulk happened over the last decade as earlier PF deposits used to be much lower.

Since you have used up the surplus, will interest rate for the next year again be solely determined by anticipated returns?

Yes. There are no more extra funds lying in the surplus account to be distributed. But the Reserve Bank of India has already signalled a rise in interest rates. Let us see what happens.