Why in news
The Reserve Bank of India increased the Ways and Means Advances (WMA) limits of State governments and Union territories to ₹60,118 crore from ₹47,010 crore effective July 1
Ways and Means Advances
The WMA scheme was introduced in 1997.
To meet mismatches in the receipts and payments of the government
Features:
The government can avail 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 (the interest rate on overdrafts is 2 percentage points more than the repo rate).
The limits for WMA (for Centre) are decided by the government and RBI mutually and revised periodically.
A higher limit provides the government flexibility to raise funds from RBI without borrowing them from the market.
There are two types of Ways and Means Advances — normal and special.
A 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.
Significance
Need of immediate and large financial resources to deal with challenges such as covid 19 for states
WMA funding is much cheaper than borrowings from markets.
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