Ways and Means Advances

Why in news?

• The Reserve Bank of India (RBI) recently said it has accepted recommendations of a committee to hike borrowing limit for states under Ways and Means Advances (WMA) by 46%, and to continue for another six months the higher limits announced last year.

What exactly is Ways and Means Advances (WMA)?

• It is a facility for both the Centre and states to borrow from the RBI. These borrowings are meant purely to help them to tide over temporary mismatches in cash flows of their receipts and expenditures.
• Section 17(5) of the RBI Act, 1934 authorises the central bank to lend to the Centre and state governments subject to their being repayable “not later than three months from the date of the making of the advance”.
• The government can avail of immediate cash from the RBI, if 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 (interest rate on overdrafts is 2 percentage points more than the repo rate.
• The interest rate on WMA is the RBI’s repo rate, which is basically the rate at which it lends short-term money to banks.
• The governments are, however, allowed to draw amounts in excess of their WMA limits. The interest on such overdraft is 2 percentage points above the repo rate. Further, no state can run an overdraft with the RBI for more than a certain period.

What is WMA limit?

• The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically.
• For the second half of the 2019-20 financial year, RBI set Rs 35,000 crore as limit for Ways and Means Advances.

Types of WMA

• There are two types of Ways and Means Advances — normal and special.
• Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state.
• After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate.
•  The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.

Prelims Question

Consider the following statements regarding Ways and means advance facility:
1.It is provided by Reserve Bank to solve temporary mismatches in cash flows of government receipts and expenditures. 
2.It is available only to central government.
Choose the correct statements from the codes given below:
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2

Answer to Prelims question