Indian pension fund says it won’t lend money to private companies

• Spooked by rising debt defaults, the Employee Provident Fund Organisation has decided to play it safe.
  
• Not just to private companies, the pension fund has decided to turn cautious even while buying bonds of government companies.
  
• EPFO also decided to exercise its early redemption options and cut down exposure to the debt-ridden DHFL.
  
• The recent crisis in non-banking financial companies, sparked by the collapse of IL&FS, has led to an acute credit crunch in the Indian economy.
  

The credit crunch in the Indian economy is getting more acute by every passing day. The latest to join the list of risk-averse financial institutions, spooked by the spike in unpaid loans, is the country’s pension fund.


The Employees Provident Fund Organisation (EPFO) which is managed by the ministry of labour and employment, today made a landmark decision to stay away from lending to private sector companies. It has decided to turn cautious while lending to state-owned companies as well.


“The Central Board of Trustees (CBT) approved the decision to withhold any further investment in Private Sector Companies Bonds and to compulsorily consider one of the two required ratings necessarily from CRISIL, CARE, ICRA and India Ratings for investments in public sector undertakings’ bonds category,” said a press release on the discussions held today.


This will be a heavy blow to the company as it invests as much as 20-45% of its incremental funds in debt instruments. And the assets of the organization that manages the pensions of hundreds of millions of Indians is at massive ₹8 lakh crore.


This is another big setback for the market sentiment which is already saddled by a slew of bad news about the economy. Sensex tumbled by 581 points today (August 22).


Twice bitten

This decision probably came after its exposure to the non-banking financial companies like IL&FS which defaulted on payments.


Though it officially never declared how much it is owed to by the scam-ridden IL&FS, the exposure is estimated at ₹570 crore, as per reports citing sources.


While the direct exposure to infrastructure lending giant would be just 0.1% of EPFO’s total investments, the decision to abstain from making fresh loans to corporates may be triggered by the wave of defaults triggered by the collapse of IL&FS.


EPFO has exposure to yet another shadow bank DHFL, which is one of the many companies that crumbled under the IL&FS debacle. In today’s meeting, the pension fund decided to exercise its early redemption options to cut down exposure to the housing finance company which is saddling heavy debt.


In 2015, the government had announced that the pension fund would invest more and make the most of the ‘world’s fastest growing economy’ tag. The Finance Minister Arun Jaitley had then said in the Budget that EPFO would invest 5% of its funds into equity and equity related schemes.


However, as things turned for the worse in the last three years, EPFO joined the list of lenders and investors who prefer keeping cash safe in the banks instead of lending to risky companies. The resulting credit crunch further hamstrung an already sluggish economy.