Ways and means advances are a loan facility provided by RBI which is often in news. Read here to know more about this economic concept.
Given the improvement in the pandemic situation, the Reserve Bank of India (RBI) decided to reduce the Ways and Means Advances (WMA) for States and Union Territories (UTs) to ₹47,010 crores from ₹51,560 crores.
Considering the uncertainties related to COVID-19, the RBI had raised the WMA limit to ₹51,560 crores for all States. The higher WMA was applicable till March 31, 2022.
How the central government meets the temporary cash needs?
The fund deficit or cash-flow mismatches of the Government are largely managed through:
- Issuance of Treasury Bills,
- Getting temporary loans from the RBI called Ways and Means Advances (WMA) and;
- Issuance of Cash Management Bills.
What are Ways and means advances (WMA)?
Ways and means advances are special features of the Indian economy. WMA are temporary advances given by the RBI to the centre and state governments to tide over any mismatch in receipts and payments.
- It was introduced in 1997 and comes under Section 17(5) of the RBI Act of 1934.
- It was introduced to end the four-decade-old system of ad-hoc treasury bills to finance the central government deficit.
States and centre pay interest linked to the repo rate on WMA withdrawals.
The government can avail of immediate cash from the RBI is 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 (the interest rate on overdrafts is 2 percentage points more than the repo rate).
WMA is not part of the Fiscal Responsibility and Budget Management Act (FRBM) because they get paid within the year itself.
Types of Ways and Means Advances:
There are two types of WMAs- normal and special.
Normal WMAs are clean advances special WMA are secured advances provided against the pledge of the Government of India dated securities.
- The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.
Special WMA is also called Special drawing rights (SDF) and is provided against the collateral of government securities held by the state.
- The operative limit for special WMA for a State is subject to its holdings of Central Government dated securities up to a maximum of the limit sanctioned.
- The interest rate for SDF is one percentage point less than the repo rate.
- After the state has exhausted the limit, it gets normal WMA.
The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically.
There is a state-wise limit for the funds that can be availed via WMA which depends on factors like total expenditure, revenue deficit, and fiscal position of the state.
- Another factor that will add to the SDF loan limit of the state government is the incremental investment in Consolidated Sinking Fund (CSF) /Guarantee Redemption Fund (GRF).
In addition to WMA, the Overdraft facility is also provided whenever financial accommodation to a state exceeds its SDF and WMA limits.
- The withdrawal above the WMA limit is considered an overdraft. A State Government account can be in overdraft for a maximum of 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.
Significance of WMA scheme
There are times of economic stress on governments, especially in situations like the Covid-19 pandemic. Ways and means advances are a scheme that relieves the financial stress on the government in the worst times.
- As frontline fighters against Covid-19, many States needed immediate and large financial resources to deal with challenges, including medical testing, screening, and providing income and food security to the needy.
When tax receipts are unpredictable owing to adverse economic conditions, the increased WMA limit allows states to borrow short-term cash from the RBI, providing a financial cushion.
The increased override limit of WMA enables states to borrow money from RBI on a short-term basis if the states are facing a budget deficit.
WMA funding is cheaper than borrowings from markets or other schemes because it has a longer maturity date, and its interest rate is also lower.
WMA can be an alternative to raising longer-tenure funds from the markets, issuing State government securities (State development loans), or borrowing from financial institutions for short-term funding.
Concerns against Ways and Means Advances scheme
Some states voiced concerns that increasing WMA limits would not be sufficient and demanded a moratorium on loans and interest for nine months.
Few states also complained about the short window to repay (90 days).
The WMA window is intended only to tide over temporary mismatches in the cash flow of receipts and payments.
Ways and Means advances are meant to pass over temporary mismatches in the cash flow of receipts and payments and are not a source of permanent financial relief. It provides leverage for both the centre and the states to borrow from the RBI and it, therefore, helps to meet the receipts and payments of the government.
Consider the following statements regarding Ways and Means Advances:
1. It is a long-term loan facility for the government with RBI.
2. The facility is exclusive to the Union Government.
3. RBI charges interest equal to the repo rate on loans given under WMA.
Which of the above statements is/are correct?
a) 1 and 2 only
b) 2 and 3 only
c) 3 only
d) None of the above