EPFO Retires Covid Advance Facility

Analysis of EPFO Retiring the COVID Advance Facility and Its Impacts on PF Returns, Consumption Patterns, and More

Table of Contents

Analysis for Layman

The Employees Provident Fund Organisation (EPFO) has decided to stop the COVID-19 advance facility, which allowed more than 22 million of its members to withdraw a part of their EPF retirement savings during the pandemic. Let’s understand some key terms:

EPF (Employees’ Provident Fund)

These are contributions deducted from salaried employees’ paychecks, which go towards building their retirement savings.

COVID Advance

It was a non-refundable withdrawal option that allowed members to take out up to 3 months’ worth of their basic pay and dearness allowance during the COVID-19 pandemic.

WHO (World Health Organisation)

It’s an international organization that ended its public health emergency declaration for COVID-19 in April 2022.

Nearly one-third of EPFO’s over 60 million members used this advance over the past three years, collectively withdrawing over ₹48,000 crore. This reduced the funds available for EPFO to invest, impacting returns for members. Experts suggest it also encouraged discretionary spending. The decision to end this facility comes seven months after the WHO’s declaration, indicating that it was kept open longer than necessary.

Impact on Retail Investors

For retail investors, the discontinuation of the COVID advance facility has both positive and negative aspects. On one hand, it can free up capital for EPFO to invest in instruments that generate returns for its members. The withdrawals were using funds that could have otherwise earned passive income.

However, the high usage of this facility suggests that it served genuine needs, especially for low and middle-income members during medical emergencies or job losses. Its discontinuation could burden employees in the future if they face health emergencies with lower PF savings.

Moreover, reduced discretionary spending may affect consumption-related stocks. But this could be balanced by an increase in demand as economies fully reopen after COVID. Investors should monitor if this change materially impacts EPFO’s fund inflows and investment strategies.

Impact on Industries

The withdrawal of this facility after disbursing ₹48,000 crore over three years can negatively affect industries where employee PF savings were being used for discretionary purchases. These sectors include:

Consumer durables: Companies like Voltas and Whirlpool may see a dip in contributions.
Automobiles: Vehicle sales could moderate due to reduced spending power.
Multiplexes, retail, hospitality: Expenditure on entertainment, dining out, and travel may decline.

However, the impact is likely to be cushioned by expectations of increased consumption as economies fully reopen after COVID. Furthermore, if more EPFO funds are invested in equity through ETFs, it could have positive effects on the broader stock market sentiment. Operationally, this change brings EPFO’s contingency procedures back to the pre-COVID status quo.

Long-Term Impact

In the long term, discontinuing the COVID advance facility refocuses attention on employees’ retirement needs rather than short-term emergencies. This helps safeguard EPF savings against dilution for non-essential current spending.

However, it also places the responsibility of building a robust emergency fund entirely on employees. With medical inflation outpacing broader consumer price inflation (CPI), low-income segments remain vulnerable to healthcare shocks unless support systems are strengthened.

Ensuring the last-mile delivery of government social security and insurance to offset the removal of facilities like the COVID advance is crucial. This prevents income insecurity in old age while maintaining consumption stability.

Short-Term Impact

In the short term, discontinuing the COVID advance can negatively impact employees if healthcare or job loss risks resurface due to new waves of the virus or macroeconomic shocks. Dampened consumer sentiment can also have slight pullback effects on overall demand across various sectors.

However, broader consumption momentum driven by factors like pent-up demand, the festive season, easing inflation, etc., may offset this impact in the next 1-2 quarters. Much also depends on how effectively EPFO channels the preserved funds into productive investments that generate returns higher than inflation.

Overall, this move doesn’t signal significant near-term disruption but highlights the need to address social security gaps.

Companies Impacted by EPFO Covid Advance Facility Discontinuation

The discontinuation of the Covid advance facility from EPF accounts could have mixed impacts on various sectors:

Indian Companies that may Gain:

Financial Institutions:
- State-owned banks: Increased savings due to reduced withdrawals could benefit banks like SBI, Bank of Baroda, and PNB.
- Mutual Funds and Asset Management Companies: Increased availability of investment funds within EPFO could lead to higher inflows for mutual funds and AMCs like HDFC Mutual Fund, ICICI Prudential AMC, and Axis Mutual Fund.
- Life Insurance Companies: Improved retirement savings could encourage individuals to invest in long-term insurance products, potentially benefiting major players like LIC, HDFC Life, and ICICI Prudential Life Insurance.
Durable Goods Companies: Increased savings with less discretionary spending could boost demand for durable goods like appliances, furniture, and electronics, potentially benefiting companies like Whirlpool, Havells, Bajaj Electricals, and Titan Company.
Housing Finance Companies: Reduced withdrawals from EPF could translate into higher household savings, potentially leading to increased demand for home loans and benefiting companies like HDFC Ltd., LIC Housing Finance, and SBI Housing Finance.

Indian Companies that may Lose:

Consumer Discretionary Companies: Reduced discretionary spending due to lower withdrawals could negatively impact sectors like retail, fast food, and entertainment, potentially affecting companies like Shoppers Stop, Jubilant FoodWorks, PVR Ltd., and Inox Leisure.
Travel and Tourism Companies: Decreased discretionary spending might lead to fewer travel expenses, impacting companies like Indian Hotels Company Ltd., SpiceJet Ltd., and MakeMyTrip Ltd.

Global Companies that may Gain:

Foreign Investors: Increased availability of funds within EPFO could attract foreign investment into Indian equities and debt markets, potentially benefiting global portfolio managers and asset allocation firms.
Global Consumer Staples Companies: The shift towards essential spending may benefit global companies selling daily necessities and consumer staples like Nestle, Unilever, and Procter & Gamble.

Global Companies that may Lose:

Global Luxury Brands: Reduced discretionary spending in India could negatively impact global luxury brands like Louis Vuitton, Gucci, and Rolex.

Market Sentiment:

The news could initially see mixed sentiment, with gains for financial institutions and durable goods companies potentially offset by losses for consumer discretionary and travel businesses.
The long-term impact will depend on how households utilize their increased savings and whether they prioritize essential spending or resume discretionary spending patterns.
Overall, the discontinuation of Covid advance could be seen as a positive step towards long-term financial stability for EPFO subscribers and potentially contribute to higher investment opportunities in the Indian economy.

Remember, this is an analysis based on the provided information. The actual impact on individual companies and the market will depend on various factors beyond the scope of this article.

Source Citation:

ET Bureau, “EPFO Retires Covid Advance Facility”, ET Bureau, Dec 27, 2023.