Higher EPFO rate to make bank FDs less attractive

NEW DELHI: Hike in interest rates on provident fund by one percentage point by the EPFO to 9.5 per cent will make fixed deposits schemes of the banks less attractive for the organised sector employees.

While the retirement fund, popularly known as provident fund, will yield 9.5 per cent on deposits held with the Employees Provident Fund Organisation (EPFO), those parking their funds with banks will get a maximum of 7.75 per cent on fixed deposits with maturity of three to ten years.

While the market leader State Bank of India pays 7.75 per cent on fixed deposits for maturity of eight to 10 years, largest private sector lender ICICI Bank gives the same interest rate on deposits ranging between 3 to 10 years.

Senior citizens, however, get an additional rate of up to one per cent on their deposits held with the banks.

An economist at a leading private sector bank said, although the number of people contributing to EPFO is far lower than the bank account holders, there could be some diversion.

However, high interest rate could drive more contribution towards EPFO, even as the lock-in period remains high in this provident fund, he said.

Industry chamber FICCI said the high rate of interest by EPFO "could also put pressure on the yield rates of some of the other competing saving instruments."

Most of the public and private sector banks had raised the interest rates on fixed deposits in August following the tightening of the monetary policy by the Reserve Bank of India.

The central bank is likely to come out with mid-quarterly review of monetary policy tomorrow. Changes in the key policy rates may have a bearing on the interest rates on bank deposits.

The Central Board of Trustees (CBT), the highest decision making body of the EPFO, today decided in favour of raising the interest rate on provident fund by one percentage point to 9.5 per cent, the highest rate in the last five years.
The interest rate on the provident fund deposit has been kept at 8.5 per cent since 2005-06.

The decision of the CBT to hike the interest rate, which is likely to be notified by the Finance Ministry, will directly benefit 4.71 crore subscribers.