Syllabus: GS3/Economy
Context
- The Employees’ Provident Fund Organisation (EPFO) and the Post Office Savings Bank (POSB) — may soon come under the Reserve Bank of India’s (RBI) supervision.
About
- Post Office Savings Bank (POSB): A ₹96 crore scam uncovered in 2024 involving fraudulent operations in POSB schemes over a 24-month period.
- Following this, it has reached out to the Department of Economic Affairs in the Ministry of Finance seeking a supervisory pact with the RBI for undertaking a review of internal controls.
- Employees’ Provident Fund Organisation (EPFO): The Ministry of Labour and Employment sought RBI’s advice on fund management and investment practices.
- The RBI’s report flagged issues like weak accounting standards, conflict of interest (EPFO acting as both regulator and fund manager).
- Follow-up: EPFO Board approved creation of a joint committee with representatives from the RBI, Finance Ministry, and Labour Ministry to address these concerns.
Need for the RBI Oversight
- Safeguarding Public Funds: Both institutions manage significant amounts of public funds — making robust oversight and governance crucial.
- The move indicates the Government’s push for financial discipline, transparency, and risk management in social security and small savings institutions.
- Governance and Accountability Concerns: The repeated instances of fraud and misappropriation, weak internal controls and manual record-keeping expose systemic vulnerabilities.
- Weak Accounting and Risk Management Frameworks: RBI’s review found weak accounting standards in EPFO’s fund management.
- There is a lack of mark-to-market valuation and actuarial assessment of liabilities.
- Conflict of Interest in EPFO Operations: EPFO acts as both regulator and fund manager for provident fund assets.
- This dual role creates potential for bias, inefficiency, and weak supervision.
- Investment Diversification: EPFO’s portfolio heavily tilted toward government and corporate debt, with limited equity exposure.
- RBI has advised gradual diversification and improved risk-return balance, aligning EPFO’s strategy with global best practices in pension fund management.
- Transparency and Public Confidence: Scams and irregularities have eroded depositor confidence in POSB and EPFO.
Significance
- RBI oversight can enforce bank-like prudential standards and improve internal governance.
- RBI’s technical expertise can help modernize accounting, strengthen audits, and ensure transparency.
- RBI oversight can help enforce segregation of functions and independent fund management norms.
- RBI’s oversight brings credibility, ensures regulatory discipline, and builds public trust in these social security institutions.
| Post Office Savings Bank (POSB) – POSB refers to the postal small-savings / savings bank schemes under the Department of Posts, Ministry of Communications. – There is already RBI’s authority over the payment-related functions of the Bank given that it comes under the Payment and Settlement Systems (PSS) Act, 2007. EPFO – EPFO is a statutory body under the Ministry of Labour and Employment. – It administers the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. – Objectives: To ensure financial security and social welfare of employees post-retirement. 1. To promote voluntary savings among employees. 2. To regulate and supervise provident fund, pension, and insurance schemes. |
Source: IE
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