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Ways and Means Advances of RBI

  Apr 26, 2021

Ways and Means Advances of RBI

Q. What is the news? 

Recently , The Reserve Bank of India (RBI) has decided to continue with the existing interim Ways and Means Advances (WMA) scheme limit of Rs. 51,560 crore for all States/UTs up to September 2021, given the prevalence of Covid-19.

Q. What is Ways and Means Advances? 
The WMA scheme was introduced in 1997.

Its objective is to meet mismatches in the receipts and payments of the government.

Q. What are its features? 

  • The government can avail immediate cash from the RBI, if required. But it has to return the amount within 90 days. Interest is charged at the existing repo rate.
  • Section 17(5) of the RBI Act, 1934 authorises the central bank to lend to the Centre and state governments subject to their being repayable “not later than three months from the date of the making of the advance”.
  • If the WMA exceeds 90 days, it would be treated as an overdraft (the interest rate on overdrafts is 2 percentage points more than the repo rate).
  • The limits for WMA (for Centre) are decided by the government and RBI mutually and revised periodically.
  • A higher limit provides the government flexibility to raise funds from RBI without borrowing them from the market.

Q. What are its types? 

  • There are two types of Ways and Means Advances — normal and special.
  • Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state.
  • After the state has exhausted the limit of SDF, it gets normal WMA.
  • The interest rate for SDF is one percentage point less than the repo rate.
  • The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.

Q. What is its significance? 

  • The cash flow problems of States have been aggravated by the impact of Covid-19, thus many States are in need of immediate and large financial resources to deal with challenges, including medical testing, screening and providing income and food security to the needy.
  • WMA can be an alternative to raising longer-tenure funds from the markets, issue of State government securities (State development loans) or borrowing from financial institutions for short-term funding. WMA funding is much cheaper than borrowings from markets.