The Reserve Bank of India on March 31 raised the limit for short term credit that the government can borrow from the central bank. 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.
Ways and means advances are temporary loan facilities provided to the government to enable it to meet temporary mismatches between revenue and expenditure. The government makes an interest payment to the central bank when it borrows money. The rate of interest is the same as the repo rate, while the tenure is three months. Under Section 17(5) of RBI Act, 1934, the RBI provides Ways and Means Advances (WMA) to the States banking with it to help them to tide over temporary mismatches in the cash flow of their receipts and payments. Such advances, are under the Act, ‘..repayable in each case not later than three months from the date of making that advance’. There are two types of WMA – normal and special. While normal WMA are clean advances, special WMA are secured advances provided against the pledge of Government of India dated securities. The operative limit for special WMA for a State is subject to its holdings of Central Government dated securities upto a maximum of limit sanctioned. In addition, the RBI has determined limits for normal and special WMA for each State as multiples of the prescribed minimum balance required to be maintained with the RBI by that State. These limits have been revised periodically.
Types of Ways And Means Advances (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.
In March 1997, the government and the RBI had stopped the practice of unlimited borrowing through ad-hoc treasury bills to help develop fiscal restraint. The limits and the rate of interest are reset twice a year, which can be also revised under extraordinary economic circumstances.