EPFO: Unexpected Saviour of Banks’ Bad Loans?

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The Employees’ Provident Fund Organization has recently amended rules that allow members to withdraw from their retirement savings for housing purposes.

As part of the government’s mandate to ensure affordable housing for all Indians, members can now withdraw a maximum of 90% of their funds to make a down payment on a new home, repay housing loans or pay monthly installments toward a new home or plot of land.

The four crore strong EPFO collects provident fund contributions on behalf of private sector employees as well as their employers.

The allowance for a one-time debit comes with provisos: members must have spent at least three years in the EPFO to withdraw any savings. They must also pool together with at least nine other account holders who are part of the co-operative society through which a new home or piece of land will be purchased.

To curb misuse, the EPFO will pay the co-operative society, developer or creditor directly, rather than give cash to account holders.

In the past, members who wanted to withdraw provident fund savings for housing purposes were required to have completed five years of service. They could only withdraw a maximum of 36 months’ worth of salary, depending on whether they were buying land or a ready-made dwelling.

The EPFO’s move has brought some hope to the real estate sector and developers, who are still smarting from last year’s shock demonetization move.

In the face of a slowdown and supply-demand mismatch, property developers already had trouble repaying massive bank debts. The EPFO changes that make owning a home easier for Indians may rub off on them, and this, in turn, could be a silver lining for India’s state-run banks, whose debtors include several builders.

State-run banks were already struggling with sluggish demand for credit: now, they have more than INR 6.14 lakh crore of non-performing assets on their books – roughly 9.5% of total gross loans, according to Credit Suisse. The Economist Intelligence Unit predicts this figure is only going to increase in the next year.

The fear is that this ballooning debt could wreak havoc on the country’s economic growth. But with the EPFO veering away from its core objective of ensuring Indians save for retirement, its support for those who want to buy homes can be a welcome stimulus for the real estate industry.

If the EPFO changes have any positive change on builders’ balance sheets, and those of related industries such as infrastructure and steel, this may very well cascade down to banks and their NPAs.

Observers expect this to bring some relief to public sector banks while they await a fresh capital infusion from the government. The real estate sector – by no means the only culprit in India’s bad loans mess – is responsible for more than INR 16,000 crore in stressed assets to public and private lenders.

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