The Reserve Bank of India gives temporary loan facilities to the centre and state governments as a banker to government. This temporary loan facility is called Ways and Means Advances (WMA).
|How the central government meets the temporary cash needs?
The fund deficit or cash-flow mismatches of the Government are largely managed through:
1. issuance of Treasury Bills,
2. Getting temporary loans from the RBI called Ways and Means Advances (WMA) and;
3. Issuance of Cash Management Bills.
(A) The WMA for the Central Government
The WMA scheme for the Central Government was introduced on April 1, 1997. Before that (for around 45 years), there was the ad-hoc treasury bills which was used to finance short term borrowings of the Central Government.
The WMA scheme was designed to meet temporary mismatches in the receipts and payments of the government. This facility can be availed by the government if it needs immediate cash from the RBI. The WMA is a loan facility form the RBI for 90 days which implies that the government has to vacate the facility after 90 days. Interest rate for WMA is currently charged at the repo rate. The borrowing limits for WMA are mutually decided by the RBI and the Government of India.
If the WMA limit is crossed by the government, it will be treated as an overdraft. The limit of borrowing under WMA for the centre is determined by both the centre and the RBI through consultation.
When the WMA limit is crossed, the government can avail funds through the overdraft facility. Overdrafts are not allowed beyond 10 consecutive working days. The interest rate on overdrafts would be 2 percent more than the repo rate.
(B) WMA (Ways and Means Advances) for states:
The state governments can get temporary loans under WMA from the RBI and the OD. Here, the OD is an extension of the WMA facility.
Under the WMA scheme for the State Governments, there are two types of WMA:
(1) Special Drawing Facility or Special WMA and
(2) Normal WMA.
Besides these two, there is the OD, which is an extension of the WMA.
1) Special Drawing Facility (SDF)
The SDF is available before availing the WMA. It is extended against the collateral (mortgaging) of the government securities held by the State Government. SDF facility is linked to the number of investments of the concerned state government in the Government of India securities, including Auctioned Treasury Bills (ATBs). The interest rate for SDF is 1% less than the repo rate.
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). If the state is not finding enough money, it can opt for the normal WMA, which has a higher interest rate.
2) Normal WMA
After the exhaustion of the special Drawing Facility limit, the State Government is provided with a normal WMA. Time period for WMA is 90 days as in the case of the central government. The amount of loans under normal WMA are based on a three-year average of actual revenue and capital expenditure of the state. The rate of interest on WMA is equal to the repo rate.
In case WMA outstanding continues for more than three months from the date of such advance, a higher interest of Repo rate plus one per cent will be charged. One important support provided by the RBI to the central and state governments in the context of the COVID-pandemic was raising the limit for WMA loans.
When the advances to the State Governments exceed their SDF and WMA limits, an Overdraft (OD) facility is being provided. OD is regulated by restricting them as a percentage of the WMA. The OD amount at 100 per cent of the WMA limit can be availed normally and OD over 100 per cent of the WMA limit had to be cleared within three working days.
A State Government account can be in overdraft for a maximum 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.
The rate of interest on overdraft will be as under:
(a) Overdraft up to 100 per cent of WMA limit – two per cent above the Repo rate, and
(b) Overdraft exceeding 100 per cent of the WMA limit – five per cent above the Repo rate.
If overdraft continues in the State’s account beyond 14 consecutive working days, the RBI and its agencies shall stop payments in respect of the concerned state government.
|WMA facilities and interest rate for the state governments|
|Scheme||Limit||Rate of Interest|
|SDF||If availed against net annual incremental investment in CSF and GRF||Repo rate minus 2 per cent|
|If availed against investment in G-sec/ ATBs||Repo rate minus 1 per cent|
|WMA||If outstanding up to 3 months from the date of making the advance||Repo rate|
|If outstanding beyond three months from the date of making the advance||Repo rate plus 1 per cent|
|OD||If availed up to 100 per cent of WMA limit||Repo rate plus 2 per cent|
|If it exceeds 100 per cent of WMA limit||Repo rate plus 5 per cent|
|Source: Review of Ways and Means Advances Scheme of State Governments/ UTs, RBI, April 2022|
The Ways and Means Advances to states are at present based on the recommendations of the Report of the Advisory Committee on Ways and Means Advances to State Governments, 2021 (Sudhir Shrivastava. Chairman). The Covid time higher allocation under WMA and the post covid reduction of the WMA limits were made after the recommendations of this committee.