Daily News Analysis

Cost of Borrowing for States

7th October, 2021 Economy

Figure 1: No Copyright Infringement Intended

 

Context:

  • As many as 17 states raised Rs 22,809 crore at the weekly auctions held on Tuesday, the first auction of the second half of the borrowing season.

Details:

  • 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.

 

About Ways and Means Advances

Sudhir Shrivastava Committee on WMA

  • 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).

When was Ways and Means Advances introduced?

  • The Ways and Means Advances scheme was introduced in 1997.

Purpose of the WMA scheme

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

How does it work?

  • 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).

What is WMA limit?

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

Types of WMA

  • 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.