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.

  1. 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 limits for WMA are mutually decided by the RBI and the Government of India.

If the WMA is extended for more than 90 days, it will be treated as an overdraft.

Overdraft

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.

  1. WMA Scheme for State Governments

The state governments can get temporary loans from the RBI from two facilities- the WMA (Ways and Means Advances) and Overdraft.

  1. WMA – includes (a) Special Drawing Facility or Special WMA and (b) Normal WMA; and
  2. Overdraft
  3. WMA (Ways and Means advances)

Under the WMA scheme for the State Governments, there are two types of WMA: Special Drawing Facility or SDF (Special WMA in the past) and Normal WMA.

  1. WMA –

(a) Special Drawing Facility or Special WMA and

(b) Normal WMA and

The interest rate on SDF and WMA will be linked with the Repo rate of the RBI.

(a) Special Drawing Facility (SDF)

The SDF is available before availing of WMA.

SDF is extended against the collateral (mortgaging) of the government securities held by the State Government. The SDF facility is linked to the quantity of investments of the concerned state government in the Government of India securities including Auctioned Treasury Bills (ATBs).

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.

(b) Normal WMA

After the exhaustion of the special Drawing Facility limit, the State Government is provided a normal WMA. Time period of WMA is 90 days. The amount of loans under normal WMA are based on 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.

  1. Overdraft

The withdrawal above the WMA limit is considered an overdraft. 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 tis agencies shall stop payments in respect of the concerned state government.

The Ways and Means Advances to states are at present based on the recommendations of the Advisory Committee on Ways and Means Advances Scheme for State Governments, 2015 (Chairman: Shri Sumit Bose).

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