RBI Way and Means Advance.

 

WMA is a mechanism used by the RBI to fund States to help them to tide over temporary mismatches in cash flows.

WMA scheme was introduced in 1997 with an aim of meeting the mismatch in the receipts and payments of the government i.e. Central as well as State.

There is a state wise limit of funds that can be availed via WMA. These lists depend on many factors, including total expenditure, revenue deficit and fiscal position of state. WMA limits are revised periodically.

 

 

Types of Ways and Means Advances:

For Central Government:

1. Ways and Means Advances :

• The WMA scheme for the Central Government was designed to meet temporary mismatches in the receipts and payments of the government. This facility can be availed by the government if it needs immediate cash from the RBI.
• The WMA is a loan facility form the RBI for 90 days which implies that the government has to vacate the facility after 90 days. Interest rate for WMA is currently charged at the repo rate (now 4.0 percent).
• The limits for WMA are mutually decided by the RBI and the Government of India.If the WMA is extended for more than 90 days, it will be treated as an overdraft.

 

2. Overdraft  :

• When the WMA limit is crossed, the government can avail funds through the overdraft facility. The interest rate on overdrafts would be 2 percent more than the repo rate.
• Overdrafts are not allowed beyond 14 consecutive working days and the number of days state/union territory can be in overdraft for 36 days in a quarter.

For State Government:

1. Ways and Means Advance:

 

1. Special Drawing Facility (SDF):

• The SDF is available before availing of WMA.SDF is extended against the collateral (mortgaging) of the government securities held by the State Government.
• The SDF facility is linked to the quantity of investments of the concerned state government in the Government of India securities including Auctioned Treasury Bills (ATBs).
• Interest rate for SDF is less than 1% of the repo rate due to backing of government securities. If the state is not finding enough money, it can opt for the normal WMA which has a higher interest rate.

 

2. Normal WMA :

• After the exhaustion of the special Drawing Facility limit, the State Government is provided a normal WMA. Time period of WMA is 90 days. The amounts of loans under normal WMA are based on three-year average of actual revenue and capital expenditure of the state.
• The rate of interest on WMA is equal to the repo rate (now 4 percent). In case WMA outstanding continues for more than three months from the date of such advance, a higher interest of Repo rate plus two per cent will be charged.

 

2. Overdraft :

• The withdrawal above the WMA limit is considered an overdraft. A State Government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter.
• Generally, the interest rate for overdraft is repo plus 2% given that it comes under the WMA limit.
• If overdraft continues in the State’s account beyond 14 consecutive working days, the RBI and its agencies shall stop payments in respect of the concerned state government.

 

Recent Changes in Economic Package announced by Finance Minister:

1. Increasing in WMA limit of 30% to 60% for State borrowings over existing limit.
2. Days of overdraft has increased from 14 to 21 and in Quarter 36 to 50 days.
3. The Limit of WMA has been increased to 2,00,000 crores first half of Financial Year 2020-2021 from 1,20,000 crore.

 

CA Shubham Chhajed