Last Updated on December 13, 2019 at 1:54 pm
The EPFO started to credit interest into subscriber accounts for 2018-2019 only from Sep, Oct 2019. Many subscribers have still not got the interest credit with some being intimated that they could be further delays. Does this represent a loss to subscribers? Will if affect compounding? Will EPF rate of return be effectively lower? Let us find out.
The answer ought to be a no-brainer. If the borrower is a non-government organisation, say a bank or corporate bond issuer or a chit fund, any delay in payment (interest or principal or both) would be equated to a fraud or a scam.
Since the EPFO if a government-backed body, interest payments delays are considered as nothing more than an inconvenience by subscribers who have no immediate need for the money.
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The reasoning provided is often this: the money is coming from the government, even it if is delayed, there will be no loss. Some also point out that though the interest payment is delayed, the correct interest will be credited and therefore there is no loss to the subscriber.
This kind of reasoning is flawed as time has a monetary value. This is routinely exploited by insurers to offer small returns under the guise of guaranteed payments. See for example: Why Time is Money and How Life Insurance Plans Exploit it!
Any delay in payment due will result in a lower internal rate of return (aka annualised return for multiple payments). For an introduction see: What is XIRR: A simple introduction. This is a loss to all EPFO subscribers whether they wish to redeem, exit or continue in the scheme.
Let us consider a simple example. Assume that you pay Rs. 1000 to the EPFO starting from April 2018. The payments are shown as negative entries to help with the internal rate of return calculation in Excel.
EPF internal rate of return illustration with zero interest
| Date | Amount |
| 01-04-2018 | -1000 |
| 01-05-2018 | -1000 |
| 01-06-2018 | -1000 |
| 01-07-2018 | -1000 |
| 01-08-2018 | -1000 |
| 01-09-2018 | -1000 |
| 01-10-2018 | -1000 |
| 01-11-2018 | -1000 |
| 01-12-2018 | -1000 |
| 01-01-2019 | -1000 |
| 01-02-2019 | -1000 |
| 01-03-2019 | -1000 |
| 31-03-2019 | 12000 |
| XIRR | 0% |
Twelve payments of Rs. 1000 are made and at the end of the financial year, the balance (shown as positive) is Rs. 12,000. So naturally, the XIRR or internal rate of return is 0%. Now let us add to this an interest payment.
EPF internal rate of return illustration with interest paid promptly
| Date | Amount |
| 01-04-2018 | -1000 |
| 01-05-2018 | -1000 |
| 01-06-2018 | -1000 |
| 01-07-2018 | -1000 |
| 01-08-2018 | -1000 |
| 01-09-2018 | -1000 |
| 01-10-2018 | -1000 |
| 01-11-2018 | -1000 |
| 01-12-2018 | -1000 |
| 01-01-2019 | -1000 |
| 01-02-2019 | -1000 |
| 01-03-2019 | -1000 |
| 31-03-2019 | 12000 |
| 31-03-2019 | 510 |
| XIRR | 8.000% |
When an interest of Rs 510 is also credited the XIRR becomes 8% The XIRR depends not only on the amount of interest but also on the date of credit.
EPF internal rate of return illustration with interest delays
The IRR decreases little by little each day the interest rate is delayed.
| Date | Amount |
| 01-04-2018 | -1000 |
| 01-05-2018 | -1000 |
| 01-06-2018 | -1000 |
| 01-07-2018 | -1000 |
| 01-08-2018 | -1000 |
| 01-09-2018 | -1000 |
| 01-10-2018 | -1000 |
| 01-11-2018 | -1000 |
| 01-12-2018 | -1000 |
| 01-01-2019 | -1000 |
| 01-02-2019 | -1000 |
| 01-03-2019 | -1000 |
| 31-03-2019 | 12000 |
| 26-12-2019 | 510 |
| Interest payment delay (days) | 270 |
| XIRR | 7.6% |
If the same Rs 510 is credited 270 days later in Dec 2019 instead of Mar 31st 2019, the XIRR drops to 7.6%. Whether this is a small drop or not is a subjective argument best left to readers. The simple fact is, interest payment delays impact IRR and is an effective loss to the subscriber.
Time is money illustration
The delay in interest credit of 270 days can be viewed as a monetary loss. Assuming no delay in payment, what interest would provide the same IRR corresponding to the delay, that is 7.6%.
| Date | Amount |
| 01-04-2018 | -1000 |
| 01-05-2018 | -1000 |
| 01-06-2018 | -1000 |
| 01-07-2018 | -1000 |
| 01-08-2018 | -1000 |
| 01-09-2018 | -1000 |
| 01-10-2018 | -1000 |
| 01-11-2018 | -1000 |
| 01-12-2018 | -1000 |
| 01-01-2019 | -1000 |
| 01-02-2019 | -1000 |
| 01-03-2019 | -1000 |
| 31-03-2019 | 12000 |
| 31-03-2019 | 483 |
| XIRR | 7.6% |
A 270-day delay is equivalent to a loss of Rs. 27 (per thousand rupees invested approximately).
Will delayed interest payment affect compounding?
Yes, it will as long as there is a delay in interest payment. The payment delay this year is not a first, it occurred in 2018 as well. If at the time you make a partial withdrawal, take a loan or exit the EPF, the outstanding balance is not what it is supposed to be, the above-mentioned loss will become real from just notional.
At the present time, there is no distinction between a notional and real loss as the future is uncertain. The EPFO has a history of poor management and poor fiscal prudence.
The Comptroller and Auditor General of India found an Rs. 1,336 Crore “gap” in the EPFO books due to over withdrawal of funds after offering excess interest. Therefore the EPFO can hardly be called a credit-worthy borrower. Anyone else would have been assigned a credit rating of “D” (= default).
As reported earlier, the EPFO is barely making ends meet and this is before the Supreme court judgement on higher EPS pensions: Higher EPS Pension: Can EPFO pay Higher Pensions or will it go bust?
According to the livemint, more than 100,000 subscribers withdraw from or settle their accounts each month! So these delays are impacting a big chunk of the subscriber base.
Considering the fact that employee contributions are mandatory, the EPFO should be made to pay a penalty for interest rate delays, but that would be like increasing the interest rate on an already unreliable borrower!
Going forward, the only viable options are (1) keep interest rates closer to market rates, (2) switch to NPS. Faster accounting and higher accountability is also necessary but will not be easy to come by.
For now, statements like, “there is no loss in interest”, “the correct amount will be credited in future” etc may placate a largely ignorant subscriber base who do not understand the time value of money. The fact remains, payment delayed is payment denied.
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