RBI Extends WMA Scheme

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Recently, the Reserve Bank of India (RBI) has decided to continue with the existing interim Ways and Means Advances (WMA) Scheme limit of Rs. 51,560 crore up to 30^th September 2021, given the prevalence of Covid-19.

Key Highlights

• The decision has been taken after recommendations of the Advisory Committee on WMA to State Governments, 2021.
  • The WMA limit arrived at by the Committee based on total expenditure of States/UTs, works out to Rs. 47,010 crore.
• The RBI held that it would review the WMA limit thereafter, depending on the course of the pandemic and its impact on the economy.

Ways and Means Advances

• These are temporary loan facilities to the Central and State Governments, given by the RBI.
• It was introduced in 1997 with the objective to meet mismatches in the receipts and payments of the government.
• Under it, the government can avail of immediate cash from the RBI and has to return the amount within 90 days.
• Interest is charged at the existing repo rate (rate at which RBI lends short-term money to banks).
• Upon exceeding 90 days, the WMA would be treated as an overdraft (the interest rate on overdrafts is 2 percentage points more than the repo rate).
• The WMA limits are decided by the government and RBI mutually and revised periodically.
• There are two types of WMA
  • Special WMA or Special Drawing Facility (SDF)
    • These are secured advances provided against the collateral of the government securities held by the state.
    • The interest rate for SDF is one percentage point less than the repo rate.
  • Normal WMA
    • These are clean advances.
    • After the state has exhausted the limit of SDF, it gets normal WMA.
    • The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.
• Significance
  • Due to the Covid-19 and its impact on the economy, States need large financial resources immediately to deal with related measures to curb it.
  • As WMA funding is cheaper than market borrowings, these can be a better alternative to raising longer-tenure funds from the markets, issue of State government securities and short-term borrowing from financial institutions.

Other Announcement

• The SDF availed by States/UTs shall continue to be linked to the quantum of their investments in marketable securities issued by the Government of India, including the Auction Treasury Bills (ATBs).
  • Issued by the Government of India, ATBs are money market instruments issued as a promissory note with guaranteed repayment at a later date.
• The net annual incremental investments in Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF) shall continue to be eligible for availing of SDF, without any upper limit.
  • CSF was first proposed by the 10^th Finance Commission and was formed in the year 1999-2000, for the amortization of open market credits benefited by the State Government.
    • This is one of the intermediaries accessible to State governments for revamping their liabilities and is a reserve through which some financial strictness is being protected.
  • GRF was established in the Public Account of India from 1999-2000 for redemption of guarantees given to Central Public Sector Enterprises (CPSEs), Financial Institutions, etc. by the Union Government whenever such guarantees are invoked.
    • Budgetary appropriations with an annual provision in the Budget feeds it and it is maintained outside the Consolidated Funds of the States. It is only used for redemption of loans.
• A uniform hair-cut of 5 per cent shall be applied on the market value of securities, for determining the operating limit of SDF on a daily basis.

Source: TH