The Reserve Bank of India (RBI) has recently announced its decision to extend the existing interim Ways and Means Advances (WMA) scheme limit of Rs. 51,560 crore for all States and Union Territories till September 2021, in view of the ongoing Covid-19 pandemic. The WMA scheme is an important financial instrument deployed by the RBI to aid governments in managing their short-term liquidity mismatches.
About Ways and Means Advances
Introduced in 1997, the WMA scheme serves as a financial tool to address mismatches in government receipts and payments. It allows the government to draw immediate cash from the RBI when required, on the condition that the amount is returned within 90 days; during this period, interest is charged at the existing repo rate. Repo Rate refers to the rate at which RBI lends short-term money to banks. If the WMA exceeds 90 days, it turns into an overdraft with an interest rate that’s 2 percentage points higher than the repo rate. The limits for WMA are mutually decided by the government and RBI and show periodic revisions.
Types of Ways and Means Advances
The WMA scheme provides two types of advances – normal and special. A Special WMA or Special Drawing Facility is provided, backed by the collateral of government securities held by the state. Once the state exhausts the limit of SDF, it can avail 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 the actual revenue and capital expenditure of the state.
Significance of Ways and Means Advances
The ongoing Covid-19 pandemic has escalated the cash flow issues of many states, warranting immediate and substantial financial resources. The WMA scheme can serve as an alternative to raising longer-tenure funds from markets, issuing state government securities (State development loans), or borrowing from financial institutions for short-term funding. Notably, WMA funding is usually cheaper than borrowings from the market.
Other Related Decisions
The RBI has also decided to link the Special Drawing Facility (SDF) available to State Governments/Union Territories with their investments in marketable securities issued by the Government of India, including Auction Treasury Bills (ATBs). The annual incremental investments in Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF) will continue to be eligible for availing of SDF.
About Auction Treasury Bills
Auction Treasury Bills are money market instruments issued by the Government of India as a promissory note with guaranteed repayment at a later date. These are typically used to meet the government’s short-term requirements and reduce the country’s overall fiscal deficit.
Consolidated Sinking Fund
The CSF was established by the RBI in 1999-2000 to aid in the redemption of state market loans. Initially, only 11 states set up sinking funds, but suggestions from the 12th Finance Commission led to more states doing the same. This fund should not be used for any purpose other than loan redemption. According to the scheme, state governments could contribute 1-3% of the outstanding market loans each year to the Fund.
Guarantee Redemption Fund
The Guarantee Redemption Fund (GRF) was created in the Public Account of India from 1999-2000 to cater to the redemption of guarantees given to Central Public Sector Enterprises (CPSEs), Financial Institutions, etc. by the Union Government when such guarantees are invoked. The budgetary appropriations feed this fund. While it was recommended by the Twelfth Finance Commission, fifteen states have set up a Guarantee Redemption Fund. This fund is meant exclusively for loan redemption purposes.
Last Modified: February 11, 2024