WAYS AND MEANS ADVANCES

IN NEWS:

• The Reserve Bank of India (RBI) has raised the limit of Ways and Means Advances to Rs 1.2 lakh crore for the first half of 2020-21.

WAYS AND MEANS ADVANCES (WMA):

• It is the temporary loan facility given by the RBI to the centre and state governments as a banker to government. This facility can be availed by the government if it needs immediate cash from the RBI.
• The WMA scheme was introduced on April 1, 1997. Before that, there was the ad-hoc treasury bills which was used to finance short term borrowings of the Central Government.
• This loan facility has a term of 90 days. If the WMA is extended for more than 90 days, it will be treated as an overdraft. 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.
• For the State Governments, there are two types of WMA: Special and Normal WMA.
  • Special WMA is provided against the collateral of the government securities held by the State Government.
  • After the exhaustion of the special WMA limit, the State Government are provided with a normal WMA which is based on a three-year average of actual revenue and capital expenditure of the state.

PRELIMS QUESTION:

Q. Consider the following statements regarding the Ways and Means Advances system:

1. It is a temporary loan facility given by the RBI

2. It is available to both central and state governments

3. It is interest free, with a term of 90 days

Choose the correct answer from the codes given below:   

A. 1 only

B. 1 and 2 only

C. 1 and 3 only

D. None of the above

Answer to Prelims question