Faced with the alarming prospect of a downward spiral in interest rates on deposits in the Employees Provident Fund in future, the labour ministry has commissioned feasibility studies on whether the EPF organisation can be turned into a bank.

The ministry's logic is that the banking activities of the EPF organisation will provide a hedge against fluctuations in the interest rate regime ensuring stability of interest rates to a class that is politically crucial to the BJP.

Labour Minister Sahib Singh Verma confirmed such a study had been commissioned, but added that this would be subject to vetting by the finance ministry.

The idea is to give employees who are members of the EPF, loans against securities from the corpus of the EPF which is over Rs 140,000 crore (Rs 1400 billion).

"We will give the investment and finance committee of the Central Board of Trustees a copy of the report. This is one option to ensure the rate of interest on EPF is not reduced," Verma told Business Standard.

The Delhi Municipal Corporation, for instance, had already offered to take a loan from the EPFO and was willing to pay an interest rate of 10 per cent, labour ministry sources said.

However, such a loan can be given only if EPFO is given permission to conduct banking operations.

Verma also told reporters on the sidelines of the launch of an ILO report on discrimination at work, that he will try to maintain the present interest rate of 9.5 per cent on EPF for 2003-04, but a final decision would be taken at the CBT meeting, likely in the last week of May.

He said a final decision by the CBT would be taken only after getting the report of its finance and investment sub committee, which had been mandated to look into the various aspects of CBT's investments.

Asked about reports that the regional provident commissioners had been asked by the CBT to stop interest payment on EPF from April, he admitted it was a "routine" measure and an appropriate order would be given only after getting the report of its sub-committee.

According to sources, Verma's assertion that he would "try to maintain" the present interest rate of 9.5 per cent, was a  "toning down" of his earlier stance in Parliament where he had ruled out a cut in rates.

Citing the recent 0.25 per cent cut in bank rate by the RBI and a coupon rate of little over five per cent on government securities, finance ministry sources said the CBT would have to cut down the interest rates as the present rates were not sustainable.

The finance ministry had recently issued a notification barring investments in special deposits scheme, which comprise over 80 per cent of the EPFO corpus, from June.