Cost of Borrowing for States

22nd September, 2021 Economy

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Context:

The cost of borrowing for states continues to decline, with the latest auction held witnessing a 7 basis points fall in weighted average pricing of their debt to a three-week low of 6.80 per cent, as the draw-down from the ways and means advances (WMA) began to jump again.

According to the borrowing calendar, Karnataka, Odisha, and Tripura were to raise Rs 9,600 crore by now but they haven’t yet tapped the market for funds.
The debt raising is slow this year as many states are meeting their revenue shortfalls by tapping the financial accommodation being provided by the RBI by way of short-term borrowing through SDF (special drawing facility) and WMA (ways and means advances) instead of the debt market.

Based on the recommendations of the Advisory Committee on WMA to State Governments, 2021 — chaired by Sudhir Shrivastava — the RBI had revised the WMA Scheme of States and Union Territories (UTs).

The Ways and Means Advances scheme was introduced to meet mismatches in the receipts and payments of the government.

The government can avail of 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.
If the WMA exceeds 90 days, it would be treated as an overdraft (interest rate on overdrafts is 2 percentage points more than the repo rate).

The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically.

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.