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Context

• The Reserve Bank of India (RBI) has announced significant measures to enhance financial support to State Governments and Union Territories.
• This includes the continuation of the Special Drawing Facility (SDF) linked to investments in government securities and an increase in the Ways and Means Advances (WMA) limits.

What Exactly is Ways and Means Advances (WMA)?

• Purpose: Ways and Means Advances (WMA) is a facility for both the Centre and states to borrow from the Reserve Bank of India (RBI). These borrowings help manage temporary mismatches in cash flows of their receipts and expenditures.
• Nature: WMAs are not a source of finance per se but a mechanism to ensure smooth cash flow management.
• Legislative Basis: Section 17(5) of the RBI Act, 1934 authorizes the central bank to lend to the Centre and state governments, with the condition that these advances must be repaid within three months from the date of the advance.

Interest Rates on WMAs

Standard Interest Rate

• Repo Rate: The interest rate on WMA is the RBI’s repo rate. The repo rate is the rate at which the RBI lends short-term money to banks.

Overdraft Interest Rate

• Higher Interest: Governments are allowed to draw amounts in excess of their WMA limits.  If the WMA exceeds 90 days, it is treated as an overdraft. The interest rate on such overdrafts is 2 percentage points above the repo rate.
• Overdraft Conditions: No state can maintain an overdraft with the RBI for more than a specified period.

Overdraft Conditions for States

• Extended Periods: The RBI extended the maximum duration a state can be in overdraft:
• From 14 to 21 consecutive working days.
• From 36 to 50 working days during a quarter.

WMA Limits:

• The limits for WMA for the Centre are determined jointly by the government and RBI and are periodically revised.

Flexibility:

• A higher limit gives the government the flexibility to raise funds from the RBI without resorting to market borrowing.

Types

Normal WMA:

• Determined based on the average of the state's actual revenue and capital expenditure over the past three years.

Special WMA (Special Drawing Facility - SDF):

• Backed by government securities held by the state. After exhausting the SDF limit, states can utilize normal WMA. The interest rate for SDF is one percentage point lower than the repo rate.

PRACTICE QUESTION Q. What is the primary purpose of Ways and Means Advances (WMA), as provided by the Reserve Bank of India (RBI)? a) To fund long-term infrastructure projects of the central and state governments b) To facilitate borrowing for capital market investments c) To manage temporary cash flow mismatches in government receipts and expenditures d) To provide emergency relief funds during natural disasters Answer c)

SOURCE: THE HINDU