THE MULISH PENSION reforms in the country seem to be gathering pace with the Reserve Bank of India (RBI) announcing norms for management of pension funds by banks. The announcement is a sequel to the government’s decision to allow banking companies to manage pension funds. The eligibility criteria for fund managers for the government’s New Pension Scheme (NPS) have been laid down by the Pension Fund Regulatory and Development Authority (PFRDA). The norms and the criteria should make it easier for the government to coax the stubborn Left to vote in favour of the Pension Bill in the parliament.
RBI norms intend to eventually permit private and foreign banks to enter the business of pension funds management. There is another norm that stands out: banks have been obliged to maintain an arm’s length relationship vis-à-vis their subsidiary which is entrusted with management of pension funds. This will ensure that pension fund management is ring-fenced from the bank’s normal operations, leading to better management of pension funds. To ensure that only banks in excellent financial health get into this business, the banking regulator has laid down certain parameters that encompass net worth, return on assets (NOA), capital adequacy ratio (CAR), etc of the bank in question. Thus a fool-proof mechanism, at least on paper, which offers no scope whatsoever for mismanagement, has been put in place, for management of pension funds by banks.
I sound a bit cynical because of the poor management of the funds of the Employees’ Provident Fund Organisation (EPFO) by the country’s leading commercial bank, the State Bank of India (SBI). SBI, which enjoys a monopoly over EPFO’s huge corpus, managed to generate a measly return of 7.39% on the funds by January 2007 in spite of blatantly violating the mandated investment pattern in the process. I am talking about the violation aspect because poor returns on funds mobilised under the statute are generally blamed on the rather stifling regulatory regime that governs the investment of the said funds. In the instant case, the regulations were observed more in the breach and yet the bank did not perform. Incidentally, the audit report on SBI’s management of the investment portfolio in 2004-05 stated that in certain cases the investments were made in the bank’s own deposit schemes, to generate a return of between 5% and 5.3% although government securities generated better returns at the time.
If a company-managed PF had committed such a violation, all hell would have broken loose. Entities like SBI are more equal than others, I suppose. Interestingly, lesser known Provident Funds (PFs) returned better income at the time. Even the Special Deposit Scheme (SDS), in which Public Sector Units (PSUs) with a surplus invest, returned 8% to investors.
Our banking regulator is not above board when it comes to effective supervising. If the Chennai-based Royapettah Benefit Fund (RBF) went down with Rs 450 crores belonging to over 1,00,000 small investors, part of the blame lies with RBI too. RBF promised a return of 17.5% to investors, 2.5% over and above what the RBI guidelines permitted at the time. The Chairman of RBF, Mr Subramanian, lent huge sums to corporates and individuals flouting RBI directions. The loans were given without obtaining any security and were even interest free, according to a section of the press; yet the Reserve Bank remained a mute spectator. Mr Srinivasulu Reddy, a Congress MP representing Ongole (Andhra Pradesh) alone owes Rs 169 crores to RBF! One Mr J M Pandey who has since filed for bankruptcy, owes Rs 37 crores!
It is difficult to believe that the RBI was unaware of the irregularities committed by the RBF management. RBI’s inaction amounts to collusion with the RBF management, covert or overt. RBI is yet to clarify how and why the fraud was allowed to be perpetuated and who is accountable for the loss incurred by small investors.
