Weekly Current Affairs: April week-1- Ways and Means Advances (WMA)

  • Category
    Economy
  • Published
    9th Apr, 2020

The central bank has announced steps to help states cope with the fallout of the covid-19 pandemic, including allowing a higher borrowing limit. 

Context

The central bank has announced steps to help states cope with the fallout of the covid-19 pandemic, including allowing a higher borrowing limit. 

About

  • 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).
  • 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.
  • The limits for this credit facility, known as ‘Ways and Means Advances’, has been raised sharply to Rs 1.2 lakh crore for the first half of 2020-21, the central bank disclosed in a release on Tuesday. This limit is set in consultation with the government.
  • Last year, the limit was set at Rs 75,000 crore set for the first half and Rs 35,000 crore set for the second half of FY20.

RBI’s role:

  • RBI, as banker to the central and state governments, provides financial accommodation to tide over temporary mismatches in the cash flow of their receipts and payments as WMA, which is intended to provide a cushion to the states to carry on their essential activities and normal financial operations.
  • According to RBI rules, the normal WMA limits are based on a three-year average of the state’s actual revenue and capital expenditure and withdrawing beyond the limit is considered an overdraft.
  • Under the prudential rules, a state government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter.
  • States pay interest linked to the repo rate on WMA withdrawals. The increase in WMA limits will obviate states’ need to resort to overdrafts.

 The measures:

  • The Reserve Bank of India (RBI) has increased the borrowing limit of all states and Union territories under the ways and means advances (WMA) facility to help them overcome the mismatch between revenue and expenditure flows because of the unprecedented 21-day nationwide lockdown.
  • Due to the pending submission of the final recommendations by an advisory committee, it has decided to increase WMA limit by 30% from the existing limit for all states and Union territories to allow them to tide over the current crisis.
  • The revised limits, it said, will come into force from 1 April and will be valid till 30 September.
  • The other measures announced by RBI include an extension of realization period for export proceeds and deferring implementation of countercyclical buffers.

Significance of the step:

  • The increased limits are expected to help state governments spend on fighting the fallout of covid-19 outbreak. Maharashtra, Telangana and Kerala have already announced salary cuts for its employees as state revenues suffer.
  • The increase in WMA limits will also allow states to not only meet targeted expenditure commitments in the absence of revenue flows but step in with emergency funding to meet the exigencies arising out of the pandemic.

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