Can MSME Sector Mobilise Rs 10 Lakh Crore of EPFO Corpus For Timely Salary Payouts?

Covid-19 pandemic has badly hit lakhs of workers employed in the Micro, Small and Medium Enterprises (MSME) sector. Due to lockdown, lakhs of such workers are facing twin threat - One: non- payment of salaries; Two: fear of termination of jobs.

In order to encourage timely disbursement of 'full salaries' to a large number of employees engaged with the MSME sector, Adarsh Gupta, Managing Partner at Liberty Footwear Company, has offered a possible solution.

In a letter written to the Prime Minister and the Labour Minister, Gupta has proposed a "Scheme of Financial Assistance for the Establishments Registered with Employee’s Provident Fund Organisation (EPFO)". As per the scheme, subject to approval by the government, funds lying with EPFO can be used as loan by employers for disbursement of full Salaries to their “Workers” for the next five-month period.

As per the details of the scheme, says Gupta, employers can be "allowed to take loan" from EPFO against the Provident Fund Corpus of their Employees from (the date of Notification by Govt of India) say 27th April 2020 to 30 September 2020 for disbursement of salary to their employees to the extent of 50 per cent of Total Corpus of such employees available with EPFO. This, Gupta argues in his letter, will be repaid by the employers with interest @ 10.5% applicable from 1st October 2020 ( allowing nearly 5 months of interest free period ) through EMI route before 31 March 2022 with an option of prepayment, says Gupta.

As per the available details, nearly 5.50 crore workers have subscribed to the EPFO. "Taking into consideration the total amount of nearly Rs One Lakh Crore available in the PF corpus, 12 month's salary at approximate Rs 15,000 per month can be paid from such corpus to all 5.50 crore employees," Gupta said in his letter.

The objective behind this move, says Gupta, is to provide cash in the hands of the suffering employees for receiving timely payment of their salaries from the loan amount through their employers, who are facing shortage of cash flow, due to the loss of business in the prevailing circumstances of Covid-19.

Commenting about the cost of funds, Gupta says in his letter that the 03 months on the interest free period of the loan amount, will be set off by enhanced rate of interest @10.5% per annum (to be borne by the employers) as against 8.5% per annum provided against PF deposit.

"The entire scheme is beneficial to all the 3-stakeholders - the government (who is allowing loans against security of amount available in Employees PF account on the guarantee of an employer. Then there will be the employees who will be receiving the money when it’s needed the most without any interest burden and moreover having "no obligation", on them.

But there are certain riders, Gupta mentions, while proposing this solution. First, Gupta says, the employers and the employees will need to continue to deposit their monthly PF contribution as per standard practice without any change. Then, any employer who would like to avail this facility, will not be allowed to terminate the services of any of his employees upto says 30 September 2020.

Gupta says the maximum amount of loan available to an employer can go up to 50 per cent of the total amount available in the PF accounts of all the employees with EPHO, whose names appear on the payroll of the applicant as on 31 March 2020. Also, the total amount of load will not exceed 6-months’ salary of employees or 50 per cent of the total amount available in the PF accounts of the employees on the payroll of the applicant, whichever of the two is lower, he said.

Lastly, Gupta proposes that the repayment will start after the interest free period is over. For example 1 October 2020 and the entire amount of loan + 10.5 per cent interest will be converted into EMI to be paid every month from October 2020 until March 2022 till full amount is repaid. "Prepayment can also be permitted without any condition," it says.